FMS Wertmanagement AöR · 2 DEPFA Group presentation from takeover in 2014 At a glance 2018 All wind-up figures and porftolio effects including currency effects. 91 2 2016 2018 2019

FMS Wertmanagement AöRAnnual Report 2019

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MANDATE: ACHIEVING MAXIMUM VALUE IN WINDING UP THE PORTFOLIO AND THE DEPFA GROUP

FMS WERTMANAGEMENT AÖR, MUNICH

FMS WERTMANAGEMENT SERVICE GMBH,

UNTERSCHLEISSHEIM

DEPFA ACS BANK DAC,

DUBLIN

DEPFAINTERNATIONAL

S.A., LUXEMBOURG

DEPFA BANK plc, DUBLIN

100% 100%

KEY STATEMENTS ON FISCAL YEAR 2019

The portfolio has been reduced by

EUR 106.4 billion overall to EUR 69.3 billion since 2010

The result from ordi-nary activities increased

considerably year-on-year, influenced by a gain on the

sale of DEPFA hybrid capital bonds and a dividend

payment disbursed by the UK subsidiary

General administrative expenses were reduced

further by achieving savings in portfolio management

As a result of transactions with FMS-WM, the

DEPFA Group’s total assets decreased to EUR 8.9 billion

as at year-end 2019, and the Tier 1 capital (CET1)

ratio rose to 152.3%

Risk provisioning and net income from invest-

ments, driven by valuation decisions and sales results, make a positive contribution

to earnings

FMS-WM’s funding was further optimised by obtain-

ing long-term funding in euros via the Financial

Market Stabilisation Fund and carrying out active funding management

Earnings forecast for 2020 is fraught with uncertainty due to the as yet unfore-

seeable effects of the turbulence on the markets –

which is why a reliable forecast cannot be made

at this time

contents

FMS Wertmanagement at a glance

Mandate and key figures ................................................................................................. U2

At a glance ..................................................................................................................... U3

A successful fiscal year 2019............................................................................................. 2

Financial report

Management report .........................................................................................................16

Fundamental information about FMS Wertmanagement ................................................16

Report on economic position ......................................................................................26

Report on risks and opportunities and forecast report ..................................................45

Internal control/risk management system relevant to the financial reporting process .......81

Annual financial statements ..............................................................................................84

Balance sheet ............................................................................................................84

Income statement .......................................................................................................86

Cash flow statement ...................................................................................................87

Statement of changes in equity ...................................................................................88

Notes ........................................................................................................................89

General information ...............................................................................................89

Notes to the balance sheet ....................................................................................99

Notes to the income statement ............................................................................113

Other disclosures ................................................................................................117

Report on post-balance sheet date events ...........................................................122

Responsibility statement ................................................................................................123

Independent auditor’s report ...........................................................................................124

Further information

Publishing information .................................................................................................... U5

F M S W E R T M A N A G E M E N T AT A G L A N C E

FMS Wertmanagement AöR Annual Report 2019

1

DEVELOPMENT OF THE PORTFOLIO OF FMS WERTMANAGEMENT (FMS-WM)

( NOMINAL VALUES IN EUR BILLION )

333.3

2010

341.8

2011 2012

246.4

2013

187.7

2014

183.6

2015

171.1

2010 1 2012 2013 2014 20152011

– 3,0

41 1

– 9,9

61

3714

6373 41

3

1 Short fiscal year from 08.07. – 31.12.20102 DEPFA Group presentation from takeover in 2014

At a glance

2018

All wind-up figures and porftolio effects including currency effects.

391

177.

2

2016 2018 2019

157.

3

2016

253

114

– 185

– 5352 93

DEPFA 2

FMS-WM

TOTAL ASSETS FMS-WM

( IN EUR BILLION AT YE AR-END )

RESULT FROM

ORDINARY ACTIVITIES

( IN EUR MILLION )

144.7

146.5

2017 2017

429

– 96– 36

2019

86.6

01.10.2010

175.7

43.9

18.0

27.2

31.12.2019

69.3

24.0

34.7

9.5

1.1

7.7

Effect due tothe acquisition of

DEPFA Group assetsin 2016 – 2018

Effect due tothe acquisition of

DEPFA Group assetsin 2019

Cumulativereduction

2010 – 2018

114.4

Reduction 2019

31.12.2018

69.0

23.1

35.0

9.51.

4

4.03.7

Commercial Real Estate Public Sector Structured ProductsInfrastructure

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1 Short fiscal year from 08.07. – 31.12.20102 DEPFA Group presentation from takeover in 2014

EMPLOYEES ( NUMBER AT YEAR-END )

DEPFA GROUP TOTAL ASSETSAND TIER 1 CAPITAL RATIO

( AT YEAR-END )

NET INTEREST INCOME( IN EUR MILLION )

146 1

552729

626

526540

2,971

1

10,2

54

433

263

– 32

– 35

Funding through borrowings via the FMS (since 2019) and the capital market

GENERAL ANDADMINISTRATIVE EXPENSES

( IN EUR MILLION )

OBTAINING LONG-TERM FUNDING

( IN EUR BILLION )

338348

129 1

334

245

210

12.3

11.6

11.0

20.8

5.710

.2 1

34.9

667

140

RISK PROVISIONS ( INCL.NET INCOME FROM INVESTMENTS)

( IN EUR MILLION )

2010 1 2012 2013 2014 20152011 20192018

175

15.8

1892

6133

339145

209401141

163363138

158336121

129317121

114297112

107293103

2016

348325

138

144

– 23

105

30.0

– 55 11

– 13 10

– 5

DEPFA 2

DEPFA 2

9072 71

5458

Tier 1 capital (CET1) ratio in % Total assets (in EUR billion)

48.5

2014 2015

36.7

2016

18.6

2017

27.6

FMS-WM

FMS-WM

Maturities > 1 Jahr

DEPFA 2

FMS-SG

FMS-WM

15.5

20.1

42.3

78.9

FMS-WM

2010 2011 2012 2013 2014 2015 2016 2017 20192018

15.4

8.9

2018 2019

109.2

152.3

2017

62

153

2010 1 2012 2013 2014 20152011 201920182016 2017

520

2010 1 2012 2013 2014 20152011 201920182016 2017

202

2010 1 2012 2013 2014 20152011 201920182016 2017

19.3

33

A SUCCESSFUL FISCAL YEAR 2019

At EUR 23 million, the balance of risk

provisions and net income from invest-

ments – both income statement items

influenced by valuation decisions and

sales results – made a positive contri-

bution to earnings in fiscal year 2019

(previous year: EUR –105 million). This

is due in particular to the active work

to wind up the portfolio.

To a significant extent, the highly sat-

isfactory result is attributable to the

tremendous capabi l i t ies and hard

work of the FMS-WM, FMS Wertman-

agement Service GmbH (FMS-SG) and

DEFPA Group employees, to whom we

express our heartfelt thanks.

Desp i te the cha l leng ing market

environment, f iscal year 2019 saw

FMS Wer tmanagement (FMS-WM)

continue its successful wind-up activ-

ities and achieve a positive result for

the year, its eighth in succession. The

result from ordinary activities came

to EUR 253 million in 2019, a sharp

increase on the prior-year figure. The

result was driven mainly by the gain

on the sale to DEPFA Group compa-

nies of two DEPFA hybrid capital bonds

acquired in f iscal year 2015 and a

dividend payment disbursed by a UK

subsidiary that has been successful

in winding up commercial real estate

loans in recent years.

FMS-WM’s statutory auditor audited

the annual financial statements as at

31 December 2019 and the manage-

ment report for fiscal year 2019 and

issued an unqualified auditors’ report.

At its meeting on 1 April 2020, the

Supervisory Board approved the annual

financial statements as prepared by the

Executive Board of FMS-WM.

Carola Falkner, Member of the Executive BoardChristoph Müller, Spokesman of the Executive Board

A successful fiscal year 2019

F M S W E R T M A N A G E M E N T AT A G L A N C E A S u C C E S S F u L F i S C A L y E A R 2 0 19


2

Upon acquisition in 2010, the wind-up

por t fol io taken over from the HRE

Group had unusually high concentra-

tions of risk and a high proportion of

illiquid exposures with very long matur-

ities. These exposures are mostly part

of asset swap packages in which they

are attached to derivatives that are

used to hedge interest rate, inflation

or currency risk. If exposures were sold

prematurely, those derivatives would

have to be closed out ahead of the

maturity date.

Despite the challenging market envi-

ronment, in fiscal year 2019 FMS-WM

sold parts of these asset swap pack-

ages, for example from the “Public

Sector” segment, on the market prior

to maturity to limit any further increase

in the concentration of risk. Excluding

the additions attributable to assets

taken over from DEPFA Group com-

panies and foreign currency effects,

the largest segment was reduced by

EUR 2.3 billion in fiscal year 2019.

Achieving maximum value in winding up the por tfolio

and the DEPFA Group

The nominal value of FMS-WM’s port-

folio rose by a total of EUR 0.3 billion

since the 2018 reporting date. Port-

folio wind-up came to EUR 5.0 billion

in fiscal year 2019. Including the assets

with a nominal value of EUR 4.0 bil-

lion acquired from DEPFA Group com-

panies in fiscal year 2019 and foreign

currency effects of EUR 1.3 billion that

increase the nominal value of the port-

folio, FMS-WM’s remaining portfolio

amounted to EUR 69.3 billion as at the

end of 2019.

The number of counterpar t ies in

FMS-WM’s portfolio fell by 8.2% in

2019 to 762. Originally, there were

3,191 counterpar ties in the por t-

folio. The number of remaining expo-

sures has dropped by 78% since

1 October 2010 to 1,591.

The individual exposures are located

in 42 countries (see chart on pages 4

and 5), with significant concentrations

in the United Kingdom, Italy and the

USA. The share of the portfolio attrib-

utable to these three countries is now

around 71%. Since the portfolio was

taken over, the number of countries in

which FMS-WM holds exposures has

been reduced by 24.

FMS-WM OVER ALL PORTFOLIO

175.7

01.10.2010

69.3

31.12.2019

9.0

– 61%

Portfolio acquired from the DEPFA Group

DE VELOPMENT OF THE NOMINAL VOLUME

( IN EUR BILLION )

3,191

01.10.2010

762

31.12.2019

174

– 76%

NUMBER OF COUNTERPARTIES

Portfolio acquired from the DEPFA Group



2


3

FMS-WM: 762 counterparties, nominal value of EUR 69.3 billion in 42 countries 1 DEPFA Group: 25 counterparties, nominal value of EUR 0.9 billion

The portfolio

usa

united kingdom

north america2

spain

south america

supranationals1

Worldwide exposures in the portfolio

33.7(496)

14.6(169)

20.3(308)

17.7(224)

8.4(83)

2.8(26)

11.3(168)

3.0(52)

0.3(14)

0.0(3)

0.0(0)

0.8(7)

Africa Tunisia

AsiaJapanSingaporeSouth KoreaVietnam

Australia

EuropeanUnion BelgiumGermanyFinlandFranceunited Kingdomirelanditaly

CroatiaLatviaLuxembourgMaltaThe NetherlandsAustriaPolandPortugalSwedenSloveniaSpainHungaryCyprus

Rest of EuropeAlbaniaicelandMacedoniaNorwaySwitzerland

Middle EastEgyptBahrainQatar

North America British Virgin islandsCanadaMexicouSA

South America BrazilChileCuraçao

Supranationals

usa

5.9(89)

0.1(1)

spain

2.5(27)

0.1(3)

other

10.1(198)

0.5(16)



4

eu3

italy

germany

japan

australia

rest of europe

cis

africa

middle east

1 Supranationals are counted as one country; the cluster was reformed after the transfer and filled with securities of international institutions

2 Excluding the uSA3 Excluding Germany, the united

Kingdom, italy and Spain4 Excluding Japan

2010Volume in EuR billion(Number of counterparties)


39.3(562)

8.1(169)

27.7(134)

17.2(62)

15.8(1,241)

3.4(32)

9.9(53)

0.2(1)

2.4(21)

0.5(5)

asia 4

2.9(31)

0.2(3)

2.2(43)

0.6(8)

1.1(25)

0.0(0)

0.2(5)

0.0(1)

0.5(16)

0.2(4)



germany

5.3(30)

0.2(5)

FMS-WM PORTFOLIO

DEPFA-PORTFOLIO



4


5

FMS-WM made fur ther progress in

winding up customer der ivat ives,

which are financing structures agreed

with local and regional public-sector

authorities. In fiscal year 2019, port-

folio managers were able to close out

a very complex French customer deriv-

ative with associated legal risk, as well

as the associated counter-hedging

transaction.

Measures implemented to reduce the portfolio’s

complexity

The wind-up of the “Commercial Real

Estate” segment progressed success-

fully in fiscal year 2019. For example,

FMS-WM initiated the wind-up of a

UK hospital operator’s significant loan

exposure by way of a company sale

and carried it out successfully in fiscal

year 2020. Beforehand, FMS-WM had

taken significant steps to restructure

the exposure; only once this restruc-

turing had been carr ied out did a

sale become possible. FMS-WM like-

wise initiated a portfolio sale related

to German and UK financings in fiscal

year 2019 and carried it out success-

fully in fiscal year 2020.

In addition to the concentrations of

risk and the high hidden losses, it is

mainly the complexity in the portfolio

that poses a particular challenge to

FMS-WM in its further wind-up activi-

ties. Among other things, this requires

comprehensive risk management and

extensive ef forts to account for the

exposures and map them to appropri-

ate IT systems.

FMS-WM’s “Structured Products” seg-

ment includes structured credit instru-

ments such as commercial mortgage-

backed securities (CMBS), with regional

concentrations in the USA and there-

fore in USD. In 2019, FMS-WM wound

up the last remaining transactions in

a highly complex sub-portfolio trans-

ferred in 2010 as a US CMBS trad-

ing strategy without affecting profit or

loss. In this case, the hold strategy ini-

tially chosen, combined with a posi-

tive outlook on the commercial real

estate market in the USA, proved to

be successful.

15.8

PORTFOLIO DISTRIBUTION

BY COUNTRY

( IN % OF NOMINAL VOLUME )

28.7

24.8

25.5

01.10.2010 31.12.2019

Other

USA

Italy

UnitedKingdom

53.5

19.2

11.5

21.0

Overall, however, the options for an

even swifter unwinding are limited, as

the still very high negative balance of

hidden losses and hidden reserves for

securities and derivatives in the amount

of EUR 16.4 billion shows that selling

all exposures immediately, while at the

same time closing out the derivatives,

would only be possible at a consider-

able loss.



6

2014 2015 2016 20192018

TOTAL ASSETS,

DEPFA GROUP

( IN EUR BILLION AT YE AR-END )

2017

48.5

36.7

27.6

8.915

.418.6

The wind-up measures implemented

in fiscal year 2019 enabled a further

reduction in the DEPFA Group’s total

assets and in the complexity and

concentrations of risk in the DEPFA

Group’s portfolio. The sale of hybrid

capital bonds with a nominal value

of EUR 625 mil l ion already held in

FMS-WM’s portfolio resulted in a pos-

itive contribution to FMS-WM’s earn-

ings in the amount of EUR 233 million.

In fiscal year 2019, as in previous years,

FMS-WM implemented key measures

aimed at winding up the DEPFA Group

in a way that maximises value.

FMS-WM continued its successful

strategy of selling DEPFA Group bonds

and promissory notes (DEPFA liabilities)

purchased on the market to DEPFA

Group companies in order to acquire

assets from DEPFA Group compa-

nies in return. Since 2016, assets with

nominal volume of EUR 11.7 billion have

been acquired from the DEPFA Group

by FMS-WM.

In the course of these two transactions

in the first quarter of 2020, the Com-

mercial Real Estate segment’s remain-

ing nominal value of EUR 1.1 billion as at

the end of 2019 was reduced to a nom-

inal value of EUR 0.4 billion, with just

eight remaining borrowers with com-

paratively short remaining maturities.

2010 2011 2012 2013 2014 2015 2016 20192018

COMMERCIAL REAL ESTATE

DEVELOPMENT OF THE

NOMINAL VOLUME

( IN EUR BILLION )

2017

20.5

27.2

13.4

5.2

16.8

8.6

1.11.42.03.1

At the time of the transfer, this seg-

ment comprised more than 3,500 indi-

vidual exposures and thus made up

almost half of all acquired positions

in FMS-WM’s portfolio. Since 2010,

FMS-WM has been able to unwind this

segment swiftly and yet in a way that

has preserved value.



6


7

2014 2015 2016 201920182017

20.1

T IER 1 CAPITAL R ATIO,

DEPFA GROUP

( CET 1 R ATIO IN % )

42.3

15.5

78.9

109.2

152.3

As a result of one-off effects of trans-

actions with FMS-WM, the DEPFA

Group’s earnings before taxes were

wel l below pr ior-year earnings at

EUR –95.1 mil l ion. The number of

DEPFA employees fell from 209 at

the end of 2014 to 107 at the end of

2019. The DEPFA Group’s general and

administrative expenses were thus

reduced by a significant 40% during

the same period.

In addition, the DEPFA Group’s organ-

isational structure was further simpli-

fied in fiscal year 2019. Following the

hybrid capital transactions, companies

and funding vehicles no longer required

were liquidated or had their liquidation

initiated. It was also possible to return

the banking licence held by DEPFA

International S.A. in Luxembourg. The

process to liquidate DEPFA Interna-

tional S.A. is to be initiated in 2020.

Helped by the transactions carried

out with FMS-WM in 2019, the DEPFA

Group’s total assets fell by a further

EUR 6.5 billion to EUR 8.9 billion as at

the end of 2019. The risks in the DEPFA

Group were also further reduced. Over-

all, total risk-weighted assets fell by

EUR 332 mill ion to EUR 551 mill ion

in f iscal year 2019, another sharp

decrease that helped lif t the Tier 1

capital (CET1) ratio to 152.3% by the

end of 2019.

In addition, DEPFA Group subordi-

nated loans with a nominal value of

EUR 360 million that had been trans-

ferred from the HRE Group to FMS-WM

in 2010 were sold to the DEPFA Group.

The I r ish bank ing regulator had

approved the reduction in the DEPFA

Group’s capital resources ahead of

the transaction. In addition, the assets

acquired by FMS-WM from the DEPFA

Group’s portfolio increase FMS-WM’s

interest income.

Hybrid capital bonds as a value lever fully utilised

The measures implemented in 2019

with a view to accelerating the wind-up

of the DEPFA Group also enabled the

funding support that FMS-WM provides

to the DEPFA Group to be reduced sig-

nificantly. The unwinding of unsecured

and therefore expensive funding instru-

ments has largely been completed and

the potential for savings realised. It was

also possible to continue unwinding the

DEPFA Group’s derivatives portfolio.



8

Portfolio management

General and administrative expenses

decl ined by 4.2% year-on-year to

EUR 138 million due in part to savings

in portfolio management. Net inter-

est income was down year-on-year

to EUR 325 mil l ion (previous year:

EUR 348 million) due to the progres-

sive unwinding of the portfolio. As in

the previous year, however, general

and administrative expenses were

well below current income from the

portfolio.

129*

NET INTEREST AND

COMMISSION INCOME VS.

ADMINISTR ATIVE COSTS

( IN EUR MILLION )

818

60*

726

582 604

2010* 2012 2013 2014 20152011 20192018

697

2016

320352

General andadministrative expenses

338348334

245

21017

5

138

144

Net interest andcommission income

*Short fiscal year

2017

153

533

611

A strong presence and access to inves-

tors in local markets, combined with

active funding management, enabled

FMS-WM’s funding terms to be further

optimised. For example, FMS-WM suc-

cessfully placed its first GDP-denom-

inated benchmark bond referenced to

SONIA (Sterling Overnight Index Aver-

age) in the amount of GBP 500 million.

Cost-ef fective funding

On the funding side, FMS-WM contin-

ues to hold the highest ratings from rat-

ing agencies Standard & Poor’s and

Moody’s due to the loss compensation

obligation contained in the Charter and

the explicit direct guarantee from the

German Financial Market Stabilisation

Fund (FMS).

On schedule in January 2019, long-

te rm EUR-denominated fund ing

was taken over by Bundes republik

Deutschland Finanzagentur GmbH

(German Finance Agency) through

the FMS. FMS-WM raised a total of

EUR 25.0 billion of funding from the

FMS in fiscal year 2019. FMS-WM itself

continues to ensure long-term funding

in foreign currencies (particularly in

USD and GBP) and short-term money

market funding.

MATURITIES OF OUTSTANDING

EUR CAPITAL MARKET ISSUES

( EQUIVALENT VALUE IN EUR BILLION )

2019 2020 202320222021

20.8

18.6

3.55.3

11.0

After 2023

4.1



8


9

Reorganisation

In connection with a change on the

Executive Board, FMS-WM did not

appoint a new Chief Operating Officer

with effect from 1 October 2019. The

responsibilities of the existing Execu-

tive Board division were taken over by

Christoph Müller as Spokesman of the

Executive Board and Chief Executive

Officer and Carola Falkner as Execu-

tive Board member with responsibility

for Treasury and Asset Management.

Change of leadership on the Executive Board and the Supervisory Board of

FMS-WM

Christoph Müller has divisional respon-

sibility for Human Resources, Finance,

Controlling & Portfolio Steering, Risk

Controlling & Quantitative Analytics,

the Communications and Committees

staff unit and, as of 1 October 2019, IT,

Sourcing & Operations.

In addition, measures were initiated

to simplify the corporate management

and optimise the organisational struc-

ture of FMS-WM and its service entity.

At the end of 2019, FMS-SG, which

since 2013 has provided extensive

services to enable FMS-WM to fulfil its

wind-up task, decided to discontinue

operations at the New York branch

over the medium term and only pro-

vide services from its sites in Dublin

and Unterschleißheim in the future.

In f iscal year 2019, measures were

implemented to create the potential

for savings on administrative expenses.

This requires a reduction in the port-

folio’s complexity. One good example

here is the almost complete closure

of the CRE segment. In the course

of this simplif ication of the portfo-

lio, IT systems previously required for

the CRE segment can be deactivated

and administrative expenses in this

area cut.

Administrative expenses also include

expenses for IT projects. The focus of

these projects is on the dismantling

and simplification of the IT system land-

scape taken over from the HRE Group

and thus on future reductions in IT

expenses. In fiscal year 2019, for exam-

ple, attention centred on successfully

consolidating FMS-WM’s two general

ledger systems. Overall, the projects

have already enabled 17 applications

to be deactivated.



10

The LIKE project launched in 2018 was

continued in 2019. With the success-

ful launch of mobile working alongside

our working time models, we are more

strongly promoting flexibility in work

organisation and therefore work-life

balance. By doing so, we are express-

ing our trust in all our employees while

at the same time encouraging them to

take responsibility.

Vacancies were once again filled suc-

cessfully through the existing employee

referral programme in 2019. The many

posit ive employee responses and

pro-actively contributed ideas and initi-

atives show both the enthusiasm for the

LIKE project and the extent to which

employees identify with FMS-WM. In

addition, our regular employee sur-

veys and the leaving interviews con-

ducted point to a considerable increase

in employee satisfaction. This is a clear

indication that such measures make an

important contribution to FMS-WM’s

operational stability.

Employees

As at 31 December 2019, FMS-WM

had 103 employees and FMS-SG 293

employees, every one of whom made

a crucial contribution to a successful

fiscal year 2019.

FMS-WM – an employer with a unique mission

Qualified, motivated and loyal employ-

ees remain essential to FMS-WM’s

ability to ensure operational stability in

fulfilling the wind-up task, especially in

light of the particular challenges that

the task brings. The wind-down sce-

nario and the resulting finite nature of

the organisation require us to devote

continual attention to retaining our

employees.

Carola Falkner assumed responsibility

for Group Treasury, Asset Management

and Group Internal Audit upon joining

the Executive Board on 1 July 2019 and

for Legal & Group Compliance as of

1 October 2019.

Jan Bettink, the long-serving Chairman

of the Supervisory Board, retired from

the Supervisory Board of FMS-WM

when his term of office ended at the

beginning of 2020. Dr. Michael Kemmer

took over as Chairman of the Super-

visory Board on 6 February 2020.

Dr. Holger Horn was a lso newly

appointed to the Supervisory Board.

He replaces Ingo Mandt, who stepped

down from the Supervisory Board in

November 2019.

In f iscal year 2019, the Supervisory

Board once again closely oversaw

the work being carried out to wind

up FMS-WM’s portfolio in a way that

maximises value. The Supervisory

Board advised the Executive Board of

FMS-WM on strategic, risk-related and

business decisions and monitored their

implementation.



10


11

Comparable actions with the same

objectives were initiated and imple-

mented at FMS-SG and DEPFA.

In addition to the retention measures,

FMS-WM once again worked contin-

uously to develop its employer brand

in 2019. Using the claim “Einzig-

artig. Endlich. Echt.” (“Unique. Finite.

Authentic.”), we present ourselves to

applicants as a transparent and open

public-sector enterprise with demand-

ing and challenging assignments and

an exceptional, but finite task.

Our harmonised employer brand,

extending from job advertisements

through to the careers website and

the integration of job platforms, aims

to arouse applicants’ interest and

motivate them to apply to FMS-WM.

Its ef fectiveness is ref lected in the

higher number of relevant applications

in terms of quality and fit and the con-

sistently positive response from candi-

dates and employees. FMS-WM’s nom-

ination for the renowned HR Excellence

Award in the “SME careers website and

app 2019” category is further proof of

our progress on employer branding.

We would like to build on this success

and continue to establish FMS-WM as

an attractive and modern employer.

We thus devote considerable time and

attention to the topic of agility so as to

best prepare both the organisation and

employees for future tasks. To ensure

successful, forward-looking human

resources management and in light of

FMS-WM’s specific orientation and the

related challenges, the continued pro-

fessional development of our managers

is another particular focus. The aim is

to best support managers in perform-

ing their duties and enhance manage-

ment qualities.



12

further management to be extended.

Among others, these include the option

to transfer the management of the port-

folio to third parties if the costs inter-

nally become too high or FMS-WM’s

operational stability cannot be ensured.

In 2020, we will again invest all our

ef for ts in systematically continuing

such measures.

In winding up the DEPFA Group, the

successful corporate actions ena-

bled FMS-WM to realise most of the

value levers identified at DEPFA. Given

the progress achieved in f iscal year

2019 and irrespective of the further

wind-up strategy, FMS-WM continues

to assume that winding up the DEPFA

Group remains the favourable option

compared with the sale that was not

carried out in 2014.

FMS-WM is also continuing to exam-

ine the possibility of selling the DEPFA

Group in 2020. In this context, the

potential proceeds from sell ing the

DEPFA Group are being compared

against the benefits to be gained from

FMS-WM continuing to wind up the

DEPFA Group.

Due to the progressive unwinding of the

portfolio, we expect a further decline

in current income from the portfolio

in fiscal year 2020. There is also the

possibility that the spread of corona-

virus (SARS-CoV-2 / COVID-19) could

do serious and sustained damage

to expected macroeconomic devel-

opments around the world. This is

particularly true for economies relevant

to the FMS-WM portfolio such as Italy,

the United Kingdom and the USA.

Even though the ef fects cannot be

fully assessed at the moment, we have

taken the necessary steps, especially

to ensure stable business operations,

that enable us to continue to fulfil our

wind-up task in 2020. Due to the pro-

gressive unwinding of the portfolio, we

expect a further decline in net inter-

est income in fiscal year 2020. As the

effects of the current turbulence on the

markets are yet not clear, an earnings

forecast for 2020 would be fraught with

uncertainty – which is why a reliable

forecast cannot be made at this time.

Outlook

The par t icu lar chal lenges fac ing

FMS-WM in its wind-up activities will

persist going forward. Especially in

light of the high negative balance of

hidden losses and hidden reserves for

securities and derivatives in the port-

folio, which would only allow all expo-

sures to be sold immediately at a con-

siderable loss, FMS-WM has drawn

up a set of medium-term objectives

for itself. These are intended to ensure

that FMS-WM continues to strike an

appropriate balance between neces-

sary (risk) management, operational

stability and cost-ef fective portfolio

management going forward.

The measures already successfully

implemented in fiscal year 2019 serve

to adapt FMS-WM’s operating model.

In particular, reducing the complexity

of the portfolio enables risk- related

and administrative expenses under

an adapted operating model to be

cut significantly over the period of the

wind-up. A simplif ied portfolio also

allows the options available for its



12


13

f inancial report

MANAGEMENT REPORT ................................................................................................16

Fundamental information about FMS Wertmanagement ...........................................16

Business and operating conditions .........................................................................16

Organisational structure .........................................................................................20

Internal management system .................................................................................22

Report on economic position ...................................................................................26

Macroeconomic and portfolio-specific developments ..............................................26

Course of business ...............................................................................................29

Employees ............................................................................................................33

Asset position, financial position and results of operations

of FMS Wertmanagement ......................................................................................34

Asset position ..................................................................................................34

Financial position .............................................................................................38

Results of operations .......................................................................................41

Overall appraisal ..............................................................................................43

Report on risks and opportunities and forecast report .............................................45

Risk report ............................................................................................................45

Report on opportunities and forecast report ...........................................................75

Internal control / risk management system relevant to the financial reporting process . 81

ANNUAL FINANCIAL STATEMENTS................................................................................84

Balance sheet ...........................................................................................................84

Income statement .....................................................................................................86

Cash flow statement .................................................................................................87

Statement of changes in equity ................................................................................88

table of contens


14

F M S W E R T M A N A G E M E N T F i N A N C i A L R E P O R T TA B L E O F C O N T E N S

Notes ........................................................................................................................89

General information ...............................................................................................89

Legal framework ..............................................................................................89

Accounting principles .......................................................................................90

Accounting policies ..........................................................................................90

Significant transactions with DEPFA Group companies .......................................98

Notes to the balance sheet ....................................................................................99

Assets .............................................................................................................99

Equity and liabilities .......................................................................................105

Notes to the income statement ............................................................................113

Net interest income ........................................................................................113

Current income from shares in affiliated companies and

other long-term equity investments .................................................................114

Income from profit transfer .............................................................................114

Net commission income .................................................................................114

Other operating income and expenses ............................................................115

General and administrative expenses ..............................................................115

Depreciation, amortisation and write-downs of intangible

and tangible fixed assets ................................................................................115

Write-downs of and valuation allowances on receivables and certain

securities, and additions to loan loss provisions ...............................................115

Income from reversals of write-downs of shares in affiliated companies,

other long-term equity investments and securities classified as fixed assets ......116

Taxes on income ............................................................................................116

Other disclosures ................................................................................................117

Auditor’s fee ..................................................................................................117

Proposal for the appropriation of net income / loss...........................................117

Shareholdings ................................................................................................118

Corporate bodies of FMS Wertmanagement ....................................................119

Report on post-balance sheet date events ...........................................................122

RESPONSIBILITY STATEMENT.....................................................................................123

INDEPENDENT AUDITOR’S REPORT ...........................................................................124


14


15

F M S W E R T M A N A G E M E N T F i N A N C i A L R E P O R T TA B L E O F C O N T E N S

management r eport

FuNDAMENTAL iNFORMATiON ABOuT FMS WERTMANAGEMENT

BuSiNESS AND OPERATiNG CONDiTiONS

Upon application by Hypo Real Estate Holding AG, Munich (HRE), the Federal Agency for

Financial Market Stabilisation, Frankfurt am Main (Bundesanstalt für Finanzmarktstabili-

sierung – FMSA), established FMS Wertmanagement AöR, Munich (FMS-WM), on 8 July 2010

in accordance with Section 8a of the German Financial Market Stabilisation Fund Act (Finanz-

marktstabilisierungsfondsgesetz – FMStFG). FMS-WM is an organisationally and financially

independent winding-up institution under public law with partial legal capacity that may engage

in legal transactions in its own name. It is regulated and supervised by FMSA and the Federal

Financial Supervisory Authority, Bonn and Frankfurt am Main (BaFin). The Financial Market

Stabilisation Fund (FMS) as the owner is obligated by law and the Charter of FMS-WM to com-

pensate the latter’s losses. The administration of the FMS created in 2008 by the FMSA was

transferred to Bundesrepublik Deutschland Finanzagentur GmbH (German Finance Agency),

Frankfurt am Main, on 1 January 2018. FMS-WM is not deemed a credit or financial services

institution as defined in the German Banking Act (Kreditwesengesetz), a securities firm as

defined in the German Securities Trading Act (Wertpapierhandelsgesetz) or an insurance com-

pany as defined in the German Insurance Supervision Act (Versicherungsaufsichtsgesetz),

nor does it engage in any transactions requiring a licence pursuant to Directive 2006/48/EC

of the European Parliament and of the Council dated 14 June 2006 relating to the taking up

and pursuit of the business of credit institutions (OJ EC L 177 dated 30 June 2006, p. 1) or

Directive 2004/39/EC of the European Parliament and of the Council dated 21 April 2004 on

markets in financial instruments, amending Council Directives 85/611/EEC and 93/6/EEC and

Directive 2000/12/EC of the European Parliament and of the Council and repealing Council

Directive 93/22/EEC (OJ EC L 145 dated 30 April 2004, p. 1.).

Under agreements dated 29 and 30 September 2010, risk positions and non-strategic oper-

ations of HRE Group 1 companies with a nominal value of about EUR 175.7 billion – exclud-

ing derivatives – were transferred to FMS-WM effective 1 October 2010. To this end both

FMSA – acting as necessary for the FMS, HRE, Deutsche Pfandbriefbank AG, Munich (pbb),

DEPFA BANK plc, Dublin (DEPA BANK plc) and other HRE Group companies – and FMS-WM

entered into a number of agreements pursuant to which certain risk positions and non-

strategic operations of HRE Group companies were transferred to FMS-WM in accordance

with Section 8a FMStFG.

1 HRE Group: HRE and its direct and indirect, domestic and foreign subsidiaries and special purpose entities

F i N A N C i A L R E P O R T / M A N A G E M E N T R E P O R T F u N D A M E N TA L i N F O R M AT i O N A B O u T F M S W E R T M A N A G E M E N T


16

The transferors, pbb and HRE, transferred risk positions and non-strategic operations to

FMS-WM, partly by way of a spin-off for absorption, in accordance with Sections 8a (1) and

(8) FMStFG in conjunction with Section 123 (2) No. 1 and Section 131 of the German Reor-

ganisation and Transformation Act (Umwandlungsgesetz – UmwG). The risk positions and

non- strategic operations that were not transferred by way of the spin-off were transferred

to FMS-WM by way of a subparticipation, assignment, novation or guarantee (“transfer via

guarantee”). Which approach was chosen depended on the different legal, regulatory and tax

requirements of the respective countries governing the respective transaction. What is com-

mon to all means of transfer however, is that FMS-WM assumed the economic risk of the risk

positions and non-strategic operations. The spin-offs were recorded in the respective German

Commercial Register for HRE and pbb as well as for FMS-WM on 2 December 2010.

The contracts also included the internal group “concentration agreements” between HRE on

the one hand and pbb, DEPFA BANK plc and other companies of the HRE Group on the other.

These concentration agreements established that HRE had claims and obligations from the

transfer of the risk positions and non-strategic operations by the HRE Group companies. HRE

spun off its contractual position and its claims under the concentration agreements to FMS-WM

as part of the aforementioned spin-off. The concentration agreements were executed directly

between the respective HRE Group company and FMS-WM by way of the afore-mentioned

subparticipations, assignments, novations or guarantees.

Until FMS-WM is liquidated, the FMS has the obligation under Article 7 (1) of the Charter of

FMS-WM to pay, on first demand by the Executive Board of FMS-WM, all amounts required

in the Executive Board’s due assessment for ensuring that the winding-up institution can pay

all its liabilities at any time on time and in full and (ii) to cover all losses of FMS-WM. Losses

in this sense comprise all amounts that are payable to FMS-WM so that it can discharge its

liabilities – as set out above – and that need not be repaid to the FMS under the conditions

set out in Article 7 (2) of the Charter.

In 2012, FMS-WM established its own service entity called FMS Wertmanagement Service

GmbH, Unterschleißheim (FMS-SG), which assumed responsibility for portfolio servicing and

the supply of all associated services effective 1 October 2013. The scope of the services

rendered by FMS-SG for FMS-WM was expanded to include accounting services effective

1 April 2015 and regulatory reporting activities effective 1 April 2016.

FMS-WM retains final decision-making powers and ultimate responsibility for the risk assets

under management. The master agreement governing the outsourcing of business processes

and services also grants FMS-WM extensive rights to obtain information and perform inspec-

tions, enabling the latter to monitor and control the servicing of the risk assets by FMS-SG.

FMS-SG operated from three sites in fiscal year 2019 (Unterschleißheim, Dublin and New York).

In addition, IBM Deutschland GmbH, Ehningen (IBM Deutschland) and DATAGROUP Financial

IT Services GmbH, Düsseldorf (DG FIS), were engaged to provide essential IT services.



16


17

Strategic objectives

FMS-WM has defined the following four strategic goals in connection with the transfer, real-

isation and wind-up of the risk positions and non-strategic operations that were moved to it

from HRE Group companies:

▶ Acceptance of non-strategic and at-risk assets, liabilities and derivatives from HRE Group

companies:

The risk assets were transferred effective 1 October 2010.

▶ Wind-up of the risk assets aimed at maximising their value, operational implementation and

refining of adequate wind-up strategies for the entire transferred portfolio:

The risk assets are unwound in a manner aimed at maximising their value subject to defined

wind-up and risk strategies that are adjusted on a continuous basis. The wind-up plan –

which must be deemed the key strategic management tool of FMS-WM – serves as the basis

for the operational implementation of these strategies.

▶ Cost-effective servicing and management of the risk assets:

The wind-up of the risk assets is carried out in part by FMS-WM itself and in part by service

providers on the basis of service level agreements. Sole responsibility for the wind-up aimed

at maximising value and the cost-effective servicing and management of the portfolio, how-

ever, rests with FMS-WM alone.

▶ Cost-effective funding:

FMS-WM shall ensure cost-effective funding for the purpose of carrying out its task. Due

to regulatory and statutory parameters FMS-WM can obtain funding at very favourable

terms. This funding is achieved through FMS-WM’s market access via the Asset Manage-

ment & Treasury division’s Group Treasury unit, the option to borrow through the FMS, the

FMS’s loss compensation obligation included in the Charter and the FMS’s explicit guar-

antee that has been in place since 1 January 2014. The FMS has been providing FMS-WM

with long-term funding in EUR since the start of 2019. FMS-WM will continue to raise long-

term liabilities denominated in foreign currencies, in particular pound sterling and US dollars,

and short-term money market funding itself.

In accordance with its Charter, FMS-WM may engage in certain kinds of banking and finan-

cial services transactions as well as operate other kinds of businesses which serve, directly

or indirectly, to unwind the transferred portfolio; however FMS-WM may not engage in any

transactions requiring a license pursuant to Directive 2006/48/EC or Directive 2004/39/EC.

The business activities of the winding-up institution cover all assets and liabilities transferred.

The wind-up plan generally does not permit FMS-WM to engage in new business activities.

Funding and hedging transactions in the context of funding and market risk management, as

well as select new business aimed at reducing risks arising from existing commitments in a

cost-efficient manner or making them more manageable (required extensions as well as select

restructuring measures), are exceptions to the above rule.



18

DEPFA BANK plc

On 19 December 2014, FMS-WM acquired 100% of the shares in DEPFA BANK plc. As an inde-

pendent bank, DEPFA BANK plc is regulated by the Central Bank of Ireland and subject, among

other things, to Irish banking and supervisory law. At the end of 2019, the DEPFA Group 1 still

employed 107 people at two sites.

As a result of the decision by the Federal Republic of Germany’s inter-ministerial steering com-

mittee on 13 May 2014 not to privatise the DEPFA Group, FMS-WM was tasked with unwinding

the DEPFA Group in a way that maximises its value. This first required a strategic realignment,

as prior to its transfer to FMS-WM, the DEPFA Group had been preparing to be re-privatised

and resume new business rather than be wound up.

Three key value levers were identified for winding up the DEPFA Group in a way that maxim-

ises its value:

▶ The funding advantages enjoyed by FMS-WM due to its rating and explicit direct guaran-

tee from the FMS are also used by the DEPFA Group as far as possible. This also includes

FMS-WM’s option to borrow through the FMS.

▶ Potential synergies emerging between FMS-WM, DEPFA and FMS-SG will be identified and

leveraged with a view to winding up these institutions as efficiently as possible.

▶ Buying debt instruments from DEPFA Group companies (“DEPFA liabilities”) enables the

cover pools for the DEPFA Pfandbrief securities to be scaled down. These purchases are

the basis on which FMS-WM assumes risk positions of DEPFA Group companies and like

the purchases of DEPFA hybrid capital bonds therefore allow the total assets of individual

DEPFA Group companies to be reduced.

Since the DEPFA Group’s acquisition by FMS-WM, the implementation of these value levers

have contributed to winding up the DEPFA Group in ways that maximise its value. The pos-

sibility of selling all or part of the DEPFA Group also continues to be considered. In this con-

text, the potential proceeds from a sale are being compared against the benefits to be gained

from continuing the accelerated wind-up of the DEPFA Group.

1 DEPFA Group: DEPFA BANK plc and its direct and indirect subsidiaries.



18


19

Locations

FMS-WM is domiciled in Munich.

Branches

FMS-WM has maintained a branch in Rome, Italy, since 2013, which commenced operations

in February 2014.

The branch in Rome consists of two full-time employees, who were taken on in February 2014

as part of a partial transfer of operations of DEPFA BANK plc, and a branch manager.

This branch winds up Italian assets with the public sector and infrastructure financing.

ORGANiSATiONAL STRuCTuRE

The organisational structure of FMS-WM is defined by its Charter; it provides for a Super visory

Board and an Executive Board as its corporate bodies.

As at 31 December 2019, the Supervisory Board had seven members. The members of the

Supervisory Board are delegated by the German Finance Agency. It is tasked with advising the

Executive Board of FMS-WM and monitoring its management activities. It is also responsible for:

▶ decisions pertaining to the wind-up plan and deviations therefrom,

▶ the resolution on the annual wind-up report,

▶ appointing and dismissing the members of the Executive Board,

▶ issuing the Rules of Procedure for the Executive Board,

▶ approving the annual financial statements and appointing the auditor,

▶ appropriation of net retained profits, and

▶ approving the final accounts.

Furthermore in matters of particular significance under the Executive Board’s purview, the

Supervisory Board may reserve decision-making authority for itself on a case-by-case basis

or in general. This shall not affect the authority of the Executive Board to represent FMS-WM

externally to legal effect.

The Supervisory Board has established two committees from among its members:

▶ The Risk Committee acts as the Supervisory Board’s central information and decision-

making body for the FMS-WM risk strategy, making decisions as part of portfolio manage-

ment activities and implementing the wind-up plan.

▶ The Audit Committee is specifically concerned with discussing the audit reports and making

preparations for the Supervisory Board’s decisions to adopt the annual financial statements.

It is responsible for appointing and monitoring the auditing firm.



20

The Executive Board manages the business of FMS-WM and represents it both in and out of

court. As at 31 December 2019, the Executive Board comprised Christoph Müller (Spokes-

man of the Executive Board) and Carola Falkner. The Executive Board is appointed by the

Supervisory Board with FMSA’s approval for terms of no more than four years; it may be reap-

pointed however.

Christoph Müller heads the CEO (Chief Executive Officer) division. This includes the four units

of Finance, Controlling & Portfolio Steering, Risk Controlling & Quantitative Analytics, IT Sourc-

ing & Operations and Human Resources as well as the Communications & Committees staff

unit. The division is responsible for external and internal accounting, the resultant reporting

and independent monitoring and reporting of risks to FMS-WM. It is also responsible for devel-

oping the wind-up strategy and preparing wind-up plans for the entire portfolio. This division

also handles the operations of FMS-WM and is responsible for the IT architecture, all procure-

ment procedures and service provider management. Furthermore, this division is in charge of

human resources, internal and external communications and the supervision of the committees.

Carola Falkner heads the Asset Management & Treasury division. This includes the four units

of Group Treasury, Asset Management, Legal & Group Compliance and Group Internal Audit.

Group Treasury is responsible for liquidity management and asset / liability management as

well as support for the derivatives portfolio of FMS-WM. Asset Management is responsible for

the lending and securities operations of the Public Sector, Structured Products, Infrastructure

and Commercial Real Estate segments. The division also comprises the Legal & Group Com-

pliance unit and the Group-wide internal audit function.

The following changes were made to the Executive Board of FMS-WM in fiscal year 2019:

Stephan Winkelmeier, Spokesman of the Executive Board with responsibility for the position

of CEO, left FMS-WM at his own request effective 30 June 2019. Christoph Müller took on the

role of Spokesman of the Executive Board with responsibility for the CEO division effective

1 July 2019. Carola Falkner was appointed to the Executive Board with responsibility for the

Asset Management & Treasury division effective 1 July 2019. Frank Hellwig, who was respon-

sible for the COO division, left FMS-WM at his own request effective 30 September 2019.

Christoph Müller and Carola Falkner assumed responsibility for the previous COO division on

1 October 2019. As part of the rearrangement of the organisational structure, the units were

divided among the two remaining divisions as stated above on 1 October 2019.



20


21

iNTERNAL MANAGEMENT SySTEM

The control system of FMS-WM is based on the company’s strategic objectives.

Unwinding of the transferred portfolio aimed at maximising value

The risk assets transferred from HRE Group companies consist of loan receivables, securities,

derivative financial instruments, rights and obligations under loan commitments, guarantees

and equity investments, along with the respective collateral.

FMS-WM’s wind-up strategy is based on a basic allocation of the portfolio into actively man-

aged and more passively managed sub-portfolios. Assets are assigned to the sub-portfolios

using defined criteria approved by the Supervisory Board. Such assignments are reviewed

regularly and adjusted as necessary. One particular focus of active management is acceler-

ated redemption or the sale of positions, with both steps being taken if necessary after carry-

ing out any restructuring. Efficient management, including monitoring to identify risk or selling

signals, is the focus for the more passively managed sub-portfolios.

To implement the wind-up strategy, the wind-up plan provides for three approaches:

▶ Hold, e. g. if risks and earnings are acceptable

▶ Sell, e. g. winding up exposures to reduce both risks and the complexity of the portfolio,

and if the market offers opportunities, or

▶ Restructure (also includes wind-up and reorganisation measures)

Within these approaches, the risk strategy of FMS-WM and its organisational structure in asset

management define further steps that drive the wind-up of the portfolio in a way which aims

to maximise the assets’ value.

As defined by FMS-WM, the “hold” approach entails actively managing loans and securities

with the aim of full repayment of all amounts outstanding. A large portion of the loans and

securities are unwound by holding and managing them until maturity.

FMS-WM defines the “sell” approach as entailing the sale of individual assets or sub- portfolios

where economically feasible. Selling decisions are made based on quantitative and qualitative

criteria that, alongside economic value maximisation, also factor in other parameters such as

the operational complexity of the servicing.

Activities serving to adjust and optimise the contractual framework of loans and securities,

where economically necessary, as well as activities serving to restructure and unwind non-

performing risk exposures, are integral to the “restructuring” approach. For every restructuring

measure, the aim is to ensure a winding-up of the respective risk exposures (whether non-

performing or performing) aimed at maximising its value, including risk mitigation measures.



22

When making decisions for individual or portfolio sales and restructuring of risk exposures,

the so-called control logic helps to ensure consistent and transparent consideration and

documentation of the decision-making criteria identified. This framework does not provide

an algorithm for generating decisions automatically. The decision-making process involves

comparing and contrasting quantifiable decision-making parameters, analysing qualitative

assessments and making case-by-case decisions based on FMS-WM’s regulation governing

the decision-making process.

The internal management system of FMS-WM is based on the annually-updated wind-up plan,

which must be approved within the existing governance framework. The key elements of the

wind-up plan are the income forecasts for the portfolio expected in the future based on the

wind-up strategy, the funding plan, the estimate of expected losses (EL) and administrative

cost budgeting.

The reporting system is managed and presented based on the four portfolio segments:

▶ Commercial Real Estate,

▶ Infrastructure,

▶ Public Sector

▶ Structured Products.

Actual results are reconciled with wind-up plan forecasts as part of this reporting.

The measures to unwind the portfolio are continually monitored by the Controlling & Report-

ing department. The Executive Board and the Supervisory Board’s Risk Committee are kept

informed of current developments in the portfolio wind-up at segment level and the causes

of any deviations from the wind-up plan in monthly reports. The balance sheet and income

statement are reconciled with forecasts on a quarterly basis and the results are reported to

the Executive Board in the Risk / Asset Liability Committee (RALCO). Based on this reconcili-

ation of budgeted and actual figures, the Executive Board determines in the RALCO whether

there is a need to adjust the business strategy and wind-up plan.

Pursuant to its Charter FMS-WM submits a monthly wind-up report to FMSA. The wind-up

report contains information on the process of realising and unwinding the portfolio as well as

on implementing the wind-up plan.

DEPFA BANK plc, which was taken over in December 2014, is managed as an equity invest-

ment. Among the items defined as primary management tools in an agreement with DEPFA

BANK plc were comprehensive information requirements for DEPFA BANK plc with regard

to FMS-WM as well as a catalogue of measures whose implementation required the prior

approval of FMS-WM. Furthermore, FMS-WM appointed the two members of its Executive

Board as “non-executive directors” to the Board of Directors of DEPFA BANK plc effective

31 December 2019. The DEPFA BANK plc’s Board of Directors is chaired by the Spokesman

of the Executive Board of FMS-WM.



22


23

The strategic goals defined by FMS-WM for the risk positions and non-strategic operations

taken over from the HRE Group also apply to the unwinding of the DEPFA Group.

The risk assets transferred from HRE Group companies were supplemented by portfolio exten-

sions in fiscal years 2016 to 2019 and thus by the transfer of additional risk positions of DEPFA

Group companies. A detailed explanation can be found in the Course of business – Business

performance section. The transferred risk assets and the extensions to the port folio are also

referred to below as the “portfolio”. The internal management system of FMS-WM is also used

for the portfolio extensions.

Cost-effective servicing and management

FMS-WM pursues the strategic objective of cost effectively servicing and managing its risk

assets. Controlling this objective is based on budget planning and budget responsibility encom-

passing FMS-WM and FMS-SG.

The Controlling & Reporting department monitors the development of costs and compliance

with the budget requirements. The Executive Board and the Audit Committee of the Super-

visory Board are regularly informed of the development of costs and deviations from budget

targets as part of the cost reporting process.

In addition, FMS-WM controls and monitors outsourced activities using a standardised service

provider management process carried out by the individual departments. This includes both

the activities outsourced to FMS-SG and activities outsourced to other service providers.

The Sourcing & Service Steering department informs the Executive Board of the contractually

defined service quality as stated in the service level agreements of all material outsourcing as

part of a monthly management report.

Cost-effective funding

FMS-WM ensures cost-effective funding in order to carry out its mandate. In determining fund-

ing requirements, the cash portion of total assets which are liquid assets and their scheduled

maturity form the basis of the annual funding plan. This also takes into account the expected

providing of cash collateral for derivatives during the planning period. In accordance with the

funding strategy planning, the future funding requirement resulting from this is met by rais-

ing funds on both the money market and the capital market, and by borrowing from the FMS.

Funding activities are regularly presented and discussed in the competent RALCO, in which

the Executive Board is also represented through membership.



24

Financial performance indicators

In its management of the wind-up of the portfolio aimed at maximising its value, FMS-WM

refers primarily to indicators that show the income from the wind-up. The central tool used

for this purpose is the wind-up report.

The key management parameter for unwinding the portfolio is the “income from the wind-up”,

i. e. the development of the portfolio adjusted for foreign currency effects. The performance

of the portfolio in fiscal year 2019 and its cumulative performance since its transfer effective

1 October 2010 are presented in the chapter entitled Course of business – Wind-up report.

The key parameters for cost-effective management are administrative cost budgeting and

development. The Executive Board and the Audit Committee of the Supervisory Board are

regularly informed of the development of these management parameters and deviations from

budget targets as part of the cost reporting process.

The cost reporting process is based on the expenses recognised in the income statement in

the items, General and administrative expenses, and Write-downs of and valuation allowances

on intangible and tangible fixed assets, in accordance with the Handelsgesetzbuch – HGB.

Significant items within general and administrative expenses include the development of per-

sonnel expenses and expenses for servicing outsourced services. These represent material

key financial performance indicators for FMS-WM.

The development of the general and administrative expenses management parameter and

the personnel and servicing expenses contained therein are presented in the chapter entitled

Asset position, financial position results of operations of FMS Wertmanagement – Results of

operations.

The key financial performance indicator for the cost-effective funding management parameter

is the total issuance volume of all capital market instruments and the funds raised via the FMS.

The development of funding activities is outlined in the chapter entitled Asset position, financial

position and results of operations of FMS Wertmanagement – Financial position.



24


25

REPORT ON ECONOMiC POSiTiON

MACROECONOMiC AND PORTFOLiO-SPECiFiC DEVELOPMENTS

Macroeconomic environment

Unless otherwise indicated, the following data is presented on an annualised basis.

Global economic growth slowed down in 2019 as a result of international trade conflicts and

associated market uncertainty about the future development of global trade. While global

industrial production stagnated, world trade volumes declined. Economic growth in the United

Kingdom was also adversely impacted by uncertainty caused by the EU withdrawal negotia-

tions. In Germany, economic growth fell, primarily as a result of the weak manufacturing sector.

However, international monetary policy was able to cushion these negative effects with positive

fiscal stimulus. According to the International Monetary Fund (IMF), global economic growth

would have dropped by a further 0.5% points in 2019 without this stimulus.

Economic growth in the euro zone weakened during the year to 1.2% in the third quarter of

2019, below the comparable figure for the previous year (1.6%). While the unemployment rate

improved to 7.5% in November 2019 (November 2018: 7.9%), inflation was at 1.3% in the fourth

quarter of 2019 and below both the European Central Bank (ECB)’s target and the comparable

prior-year figure (1.5%). The German economy grew by a further 1.0% in the first quarter of

2019 and reported weaker growth of 0.5% in the third quarter of the year than in the same

period in the previous year (1.1%). While the Italian economy still recorded a 0.02% decline

in the first quarter of 2019, it recovered over the course of the year to grow by 0.3% in the

third quarter of the year. To provide the European economy with a further monetary boost,

the ECB decided in September 2019 to lower the deposit rate from –0.4% p. a. to –0.5% p. a.,

resume bond purchases at EUR 20 billion per month and continue with targeted longer-term

refinancing operations.

Economic growth in the United Kingdom slowed significantly during the year to 1.1% in the third

quarter of 2019 (prior-year period: 1.6%). While inflation declined to 1.3% in 2019 (2018: 2.1%),

the unemployment rate was slightly below the previous year’s figure at 3.8% as at November

2019 (previous year: 4.0%).

In the USA, economic growth slowed from 2.7% in the first quarter of 2019 to 2.1% in the third

quarter of 2019 (prior-year period: 3.1%) as consumer demand and gross commercial capital

investments weakened. Inflation initially dropped to 1.6% in the middle of 2019 before rising

to 2.3% by the end of the year (2018 year-end: 1.9%). The US Federal Reserve (Fed) kept key

interest rates at 2.5% p. a. until the middle of 2019 and dropped them during the second half to

1.8% p. a. by the end of the year, particularly due to uncertainty in the global markets caused

by the trade dispute between the USA and China. At 3.5% (2018 year-end: 3.8%), the unem-

ployment rate was lower at the end of 2019 than at any time since 1970.

F i N A N C i A L R E P O R T / M A N A G E M E N T R E P O R T R E P O R T O N E C O N O M i C P O S i T i O N


26

Commercial Real Estate

FMS-WM used the favourable market environment in fiscal year 2019 to successfully press

ahead with the unwinding of the portfolio. Geographically speaking, the remaining portfolio is

focused on German, UK and US financing.

The German real estate market continued to experience high transaction volume. The real

estate price index stood at 115 index points in the third quarter of 2019 (+4.1% compared to

the previous year’s figure). Investment turnover across all asset classes remained at a high

level in 2019.

Investment volumes in the United Kingdom (approx. GBP 45 billion) fell significantly in 2019

compared to the previous year (approx. GBP 65 billion), reflecting the uncertainty triggered

by EU withdrawal negotiations.

The US real estate market also reported a considerable decline in investments in 2019.

Infrastructure

In 2019, global infrastructure transactions with a total volume of USD 651 billion were com-

pleted, with refinancing accounting for USD 189 billion of this total. The largest share was

attributable to Europe with a volume of USD 216 billion, followed by North America with a

volume of USD 199 billion. Significantly more refinancing (+35%) was carried out in Europe

compared to the previous year as a result of persistently low interest rates; refinancing volumes

have doubled since 2016.

The dominant sectors for global infrastructure financing in 2019 were the energy sector (26%),

the transport sector (25%) and renewable energy (21%). In 2018, renewable energy was still

the strongest sector with a share of 27% together with transport sector (24%).

Public Sector

The development of the global financial markets was characterised by the trade dispute

between the USA and China and fears of a slowing global economy on the one hand and

supportive monetary stimulus from central banks on the other hand.

Uncertainty in the European financial markets was predominantly driven by politics and the

economy. The USA threatened to raise tarif fs on European products, the outcome of the

United Kingdom’s withdrawal negotiations with the EU was uncertain until the end of 2019

and a new Italian government was formed during the year under review. In economic terms,

the European economy showed the initial effects of the USA’s trade dispute with China. It

was supported by the ECB’s measures, particularly the resumption of bond purchases. Yields

on 10-year German government bonds fell from 0.16% at the start of the year to –0.71% in

August 2019 before rising to –0.18% by the end of the year due to reduced uncertainty. Risk

premiums on Italian government bonds were impacted by domestic political developments. As

a result, spreads on 10-year Italian government bonds widened from around 159 basis points

at the start of the year to as much as 287 basis points during the course of the year, falling

to 130 basis points by the end of 2019. This dramatic narrowing was primarily caused by the

change of government in August 2019, when EU-sceptic party Lega lost power. Easing con-

cerns about the cohesion of the euro zone helped spreads in peripheral countries such as

Spain and Portugal to narrow from 117 to 64 basis points and 147 to 61 basis points respec-

tively during the course of the year.



26


27

The United Kingdom’s EU withdrawal negotiations also caused uncertainty in 2019, although

this abated at the end of the year after the general election in December 2019. The euro

exchange rate reflected the uncertainty driven by EU withdrawal negotiations. The euro was

worth GBP 0.9017 at the start of 2019, reaching a high of GBP 0.9282 during the year before

ending the year at GBP 0.8508. Weak economic development and low inflation combined with

the EU withdrawal negotiations caused yields on British 10-year government bonds to fall from

1.3% p. a. at the start of 2019 to 0.7% p. a. at the end of the year.

Yields on 10-year US-bonds dropped from 2.7% p. a. in January 2019 to 1.6% p. a. in

December 2019. This development was triggered by rising uncertainty caused by the trade dis-

putes with China, lower inflation expectations and the reduction in key interest rates by the Fed.

Structured Products

US municipals

Investors in US municipal bonds observed lower risk premiums in 2019 than in the previous

year. The credit quality of US municipal bonds remained good in 2019, with investment grade

ratings dominating the market.

Slight narrowings of risk premiums were evident in the risk exposures in California, Illinois and

New Jersey relevant to FMS-WM in this subsegment. The pension system in Illinois remains

underfunded. However, there was no downgrade by the rating agencies by the end of 2019.

The new issue volume of over USD 400 billion expected for 2019 was slightly exceeded.

Asset backed securities (ABS)

Risk premiums on European ABS securities narrowed in 2019, with higher prices observed

in the market as a result. Issue volume was in line with expectations for 2019 at around

EUR 100 billion. The volume of ABS securities placed in the USA also met expectations at

approximately USD 233 billion.

Variable-rate ABS securities from the US Federal Family Education and Loan Program (FFELP)

currently pose a challenge to the market, as the fall-back clauses included in these agree-

ments stipulate that the last quoted price should be used as a fixed interest rate if the LIBOR

benchmark is discontinued. The resulting uncertainty steadily expanded the risk premiums

on FFELP bonds during the course of 2019.



28

COuRSE OF BuSiNESS

Business performance

The business activities and annual financial statements of FMS-WM as at 31 December 2019

strongly reflect both the ongoing portfolio wind-up and measures to wind up the DEPFA Group

while maximising its value.

FMS-WM posted a positive result from ordinary activities of EUR 253 million (previous year:

EUR 114 million) for fiscal year 2019. Taking into account the tax expense of EUR 17 million

( previous year: tax income of EUR 1 million), net income for the fiscal year amounts to

EUR 236 million (previous year: EUR 115 million). Performance has therefore exceeded the

statement made in the outlook for the 2019 fiscal year, which expected FMS-WM to at least

break even. The contribution to earnings from net interest and net commission income total-

ling EUR 320 million includes one-off effects of EUR 19 million. Even excluding these one-off

effects, the sum total of net interest and net commission income is well in excess of general

and administrative expenses of EUR 138 million (previous year: EUR 144 million). The result

from ordinary activities was also impacted by a dividend disbursed by Flint Nominees Ltd.,

London (Flint Nominees Ltd.) amounting to EUR 49 million. In fiscal year 2019, a gain of

EUR 233 million was realised on the disposal of the hybrid capital bonds of DEPFA Fund-

ing II LP, London (DEPFA Funding II) and DEPFA Funding III LP, London (DEPFA Funding III),

which is recognised in net income from investments. The positive balance of the items influ-

enced by valuation and sales decisions (risk provisions and net income from investments) in

the amount of EUR 23 million (previous year: EUR –105 million) contributed to the positive

result from ordinary activities of EUR 253 million.

In connection with the mandate received in May 2014 to unwind the DEPFA Group in a way

that maximises its value, FMS-WM again acquired additional liabilities from DEPFA Group

companies (“DEPFA liabilities”) with a nominal volume of EUR 0.1 billion in fiscal year 2019. At

31 December 2018, FMS-WM was already holding purchased DEPFA liabilities with a nominal

value of EUR 1.2 billion. Effective 7 June 2019, FMS-WM sold acquired DEPFA liabilities with

a nominal volume of EUR 1.3 billion to DEPFA ACS BANK DAC, Dublin (DEPFA ACS). In direct

connection with the sale of these liabilities, in a further step risk positions of DEPFA Group

companies were acquired with a nominal volume of EUR 1.6 billion (“1st portfolio extension

in fiscal year 2019”).

Effective 18 November 2019, FMS-WM sold subordinated (TIER II loans) of DEPFA BANK plc

with a nominal volume of EUR 0.4 billion to DEPFA BANK plc and sold the two hybrid capital

bonds of DEPFA Funding II and DEPFA Funding III acquired in fiscal year 2015 with a nominal

volume of EUR 0.6 billion to the issuers. In direct connection with the sale of the TIER II loans

and the hybrid capital loans, in a further step risk positions of DEPFA Group companies were

acquired with a nominal volume of EUR 1.0 billion (“2nd portfolio extension in fiscal year 2019”).

Effective 16 December 2019, FMS-WM acquired risk positions from DEPFA ACS with a nominal

volume of EUR 1.4 billion (“3rd portfolio extension in fiscal year 2019”). In connection with the

acquisition of these exposures by FMS-WM, DEPFA BANK plc repaid drawdowns on liquidity

facilities extended by FMS-WM.



28


29

As part of the portfolio extensions in fiscal year 2019 combined with portfolio extensions from

fiscal years 2016 to 2018, risk positions of DEPFA Group companies with a total nominal volume

of EUR 11.7 billion 1 were acquired. Unless specified in greater detail, the portfolio extensions

for fiscal years 2016 to 2019 are henceforth summarised by the term “portfolio extensions”.

The portfolio extensions in fiscal year 2019 are thus summarised as such.

As a safeguard against interest rate risks, interest rate hedges related to the described trans-

actions were then entered into as part of the wind-up of the DEPFA Group, both in the market

and with companies in the DEPFA Group.

The nominal amounts of receivables of the risk positions acquired as part of the port folio

extensions in fiscal year 2019 are as follows for the respective balance sheet items as at

31 December 2019:

Nominal value

1st portfolio extension

2nd portfolioextension

3rd portfolioextension Total portfolio

extensions, 2019 in EUR million

31.12.2019 in EUR million



Loans and advances to banks 0 362 0 362

Loans and advances to customers 384 201 0 585

Debt instruments 1,081 486 1,375 2,942

Total 1,465 1,049 1,375 3,889

94% of the risk positions acquired as part of the portfolio extensions for fiscal year 2019 con-

sisted of financing with an investment grade rating. For more information, see the presenta-

tion in the credit risk section of the risk report.

In fiscal year 2019, FMS-WM’s liquidity was above the liquidity threshold relevant for man-

agement purposes at all times. As regards issuance activities at FMS-WM, the total issuance

volume of all capital market instruments amounted to EUR 5.0 billion in 2019. Funding of

EUR 25.0 billion was obtained via the FMS.

1 As of each respective acquisition date: November 2016: EUR 5.2 billion, November 2017: EUR 2.0 billion, November 2018: EUR 0.5 billion, June 2019: EUR 1.6 billion, November 2019: EUR 1.0 billion, December 2019: EUR 1.4 billion.



30

Wind-up report

The monthly wind-up report provides information on the income from the wind-up (cumulative

portfolio development based on nominal values). This income, which is adjusted for foreign

currency effects, is a financial performance indicator for the reduction of the portfolio.

The following table shows the cumulative portfolio development from 1 October 2010 (the date

of transfer) to 31 December 2019. The cumulative portfolio development also includes the

additions resulting from the extensions to the portfolio as well as the unwinding of the port-

folio completed by the reporting date in relation to the extensions to the portfolio.

Development of the portfolioCumulative in EUR billion

Nominal wind-up portfolio as at 01.10.2010 175.7

– Cumulative portfolio development –109.5

Of which: Portfolio extensions (nominal) +11.7

Portfolio wind-up (of which attributable to portfolio extensions: EUR –2.7 billion) –121.2

+ Currency effects +3.1

Nominal extended wind-up portfolio as at 31.12.2019 1 69.3

1 Translated at exchange rates as at 31 December 2019

The following table shows the portfolio development in fiscal year 2019 (taking into account

the portfolio extension in fiscal year 2019) and the reconciliation of the nominal volume of the

extended wind-up portfolio to total assets as at 31 December 2019:

Development of the portfolio2019 fiscal year in EUR billion

Nominal extended wind-up portfolio as at 31.12.2018 69.0

– Portfolio development, fiscal year –1.0

Of which: Portfolio extensions in fiscal year 2019 (nominal) +4.0

Portfolio wind-up in fiscal year 2019 (of which attributable to portfolio extensions: EUR –0.9 billion) –5.0

+ Currency effects +1.3

Nominal extended wind-up portfolio as at 31.12.2019 1 69.3

– undrawn credit lines and guarantees –0.3

+ Portfolio of own issues (nominal) +14.8

+ Other receivables / receivable components / other +62.7

Total assets as at 31.12.2019 146.5

1 Translated at exchange rates as at 31 December 2019

“Other receivables / receivable components / other” mainly contain cash collateral provided

for derivatives, the amortised cost of derivatives taken over, receivables from the utilisation of

liquidity facilities issued, current credit balances and accrued interest.



30


31

Based on nominal values, the cumulative portfolio development since the 1 October 2010 trans-

fer date was as follows as at 31 December 2019, taking the portfolio extensions into account:

Segment / nominalCumulative

01.10.2010in EUR billion

Portfolio developmentin EUR billion

Currency effectsin EUR billion


Commercial Real Estate 27.2 –26.2 +0.1 1.1

infrastructure 18.0 –8.5 +0.0 9.5

Public Sector 86.6 –52.2 +0.3 34.7

Structured Products 43.9 –22.6 +2.7 24.0

Total 175.7 –109.5 +3.1 69.3

Taking the portfolio wind-up and the additions from portfolio extensions into account, the

extended wind-up portfolio decreased to EUR 69.3 billion as at 31 December 2019. Not includ-

ing countervailing currency effects, this corresponds to a reduction of EUR 109.5 billion since

1 October 2010. The reduction consists of the wind-up of the portfolio transferred in 2010

and the additions resulting from portfolio extensions, as well as their wind-up by the balance

sheet date. The reduction was brought about through scheduled and unscheduled redemp-

tions as well as sales.

Based on nominal values, the development of the extended wind-up portfolio, broken down

by segments, was as follows in fiscal year 2019, taking the portfolio extensions in the fiscal

year into account:

Segment / nominal2019 fiscal year


Portfolio developmentin EUR billion

Currency effectsin EUR billion


Commercial Real Estate 1.4 –0.4 +0.1 1.1

infrastructure 9.5 –0.4 +0.4 9.5

Public Sector 35.0 –0.7 +0.4 34.7

Structured Products 23.1 +0.5 +0.4 24.0

Total 69.0 –1.0 +1.3 69.3

Taking into account the additions resulting from the portfolio extensions in fiscal year 2019,

the extended wind-up portfolio was reduced (before currency effects) by EUR 1.0 billion during

the year under review. The portfolio extensions in fiscal year 2019 are assigned to the Public

Sector (EUR 1.6 billion as of the acquisition date) and Structured Products (EUR 2.4 billion as

of the acquisition date) segments.

Excluding the effects of additions resulting from the portfolio extensions in fiscal year 2019, the

portfolio was reduced (before foreign currency effects) by EUR 5.0 billion 1 in the fiscal year. The

reduction of EUR 7.0 billion forecast in the outlook for fiscal year 2019 was therefore not fully

implemented. In addition to the unwinding of the portfolio, several securities positions were

not sold, but were instead hedged by purchasing credit derivatives in light of the strategy of

unwinding the portfolio in a way that maximises value. This was also the main reason why the

wind-up of EUR 7.0 billion forecast in the outlook for fiscal year 2019 was not fully achieved.

1 The reduction refers to the original wind-up portfolio and the portfolio extensions.



32

EMPLOyEES

As at 31 December 2019, FMS-WM had 103 employees (31 December 2018: 112 employ-

ees). The target figure is adjusted regularly to reflect requirements; it currently stands at 114

employees. The trend in employee numbers and thus the balance between the target figure

and the actual number of employees – is a non-financial performance indicator for FMS-WM

which is reviewed annually as part of the wind-up planning process and adjusted to current

conditions during the year as necessary.

The Executive Board of FMS-WM is convinced that motivated, committed and loyal employees

are essential to the success of FMS-WM. It is therefore important that employees are able to

optimally contribute their individual skills and experience to FMS-WM, and are always given

opportunities for personal development even against the backdrop of a wind-up scenario.

Key elements of staff development efforts, and a central pillar for long-term employee loyalty

and identification with FMS-WM, include regular employee appraisals, continual feedback on

performance, as well as forward-looking, systematic and needs-based continuing profes-

sional development planning.

With the unwinding of the portfolio, FMS-WM has assumed a complex task and committed

itself to a high degree of professionalism. FMS-WM places very high demands on all of its

employees. The many years of professional experience of the individual employees reflect what

has been a high level of qualifications from the outset. FMS-WM considers it very important

to sustain this level and thus to maintain the availability of the necessary technical expertise

for the tasks it faces throughout the entire winding-up period. Existing knowledge is therefore

expanded through continuous and targeted training. A key challenge is to make sure that suffi-

cient know-how is retained despite high employee turnover and that suitable long-term internal

successors can be found. Measures such as job rotation and cross-departmental and cross-

division project work play an important role in passing on and securing existing know-how.

In addition to professional training, great emphasis is placed on helping employees develop

their personal skills and in continuously investing in leadership through concrete measures.

A Staff Council, which currently comprises four members, has been in place at FMS-WM since

the third quarter of 2016.

The project “LIKE” was launched in fiscal year 2018 with the aim of retaining employees as

well as enhancing FMS-WM’s appeal as an employer for new employees. Numerous measures

were implemented as part of this project in fiscal years 2018 and 2019 with the aim of rein-

forcing and strengthening employees’ sense of identification with the organisation as well as

increasing the quality and quantity of its applicants and accelerating the recruiting process.

The staff turnover rate fell in fiscal year 2019 compared to fiscal year 2018.



32


33

ASSET POSiTiON, FiNANCiAL POSiTiON AND RESuLTS OF

OPERATiONS OF FMS WERTMANAGEMENT

Asset position

The asset position of FMS-WM as at 31 December 2019 continues to be dominated by the

transfer of risk positions of the HRE Group as at 1 October 2010 and FMS-WM’s mandate to

wind up the DEPFA Group in a way that maximise its value. As at 1 October 2010, FMS-WM

took over assets, liabilities, provisions, accrued and deferred items, derivative financial instru-

ments as well as other executory contracts from the transferring legal entities for accounting

purposes as at that date. Since then, FMS-WM’s asset position has also been significantly

affected by the shares in DEPFA BANK plc acquired in the course of winding up the DEPFA

Group, the hybrid capital bonds acquired, the extensions to the portfolio, the purchases of

DEPFA liabilities and the drawdowns on the liquidity facilities extended to DEPFA BANK plc. In

fiscal year 2019, FMS-WM sold the two hybrid capital bonds, acquired in fiscal year 2015, of

DEPFA Funding II and DEPFA Funding III to the issuers and the subordinated loans (TIER II loans)

to DEPFA BANK plc.

In fiscal year 2019, FMS-WM’s asset position was influenced significantly by the rise in the

cash reserve and in cash collateral provided for derivatives as well as by the increases attrib-

utable to the portfolio extensions in fiscal year 2019 and to currency effects. In connection

with the task of winding up the DEPFA Group, interest rate hedges were entered into with

DEPFA Group companies and on the market in the context of the portfolio extensions in fiscal

year 2019. The payments made for these had the effect of increasing prepaid expenses. The

reduction in own issues repurchased and the unwinding of the portfolio had a partly offset-

ting effect on FMS-WM’s asset position. In addition, the liquidity facilities extended to DEPFA

BANK plc were undrawn as at 31 December 2019.



34

Taking contingent liabilities and other obligations into account, FMS-WM posted a business

volume of EUR 149.1 billion as at 31 December 2019 (31 December 2018: EUR 149.0 billion).

The enumeration below provides an overview of the amount and composition of the business

volume of FMS-WM as at 31 December 2019:

Assets31.12.2019

in EUR million31.12.2018

in EUR million

Cash reserve 6,097 4,869

Loans and advances to banks 34,671 36,028

Loans and advances to customers 15,731 13,300

Debt instruments 80,270 82,078

Shares and other non-fixed-income securities 0 386

Other long-term equity investments 0 0

Shares in affiliated companies 474 493

intangible and tangible fixed assets 0 1

Other assets 478 890

Prepaid expenses 8,768 6,665

Total assets 146,489 144,710

Equity and liabilities31.12.2019


in EUR million

Liabilities to banks 3,545 10,028

Liabilities to customers 40,979 13,727

Securitised liabilities 80,933 102,185

Other liabilities 652 403

Deferred income 18,288 16,387

Provisions 341 465

Equity 1,751 1,515

Total equity and liabilities 146,489 144,710

Contingent liabilities 658 768

Other obligations 1,916 3,526

Business volume 149,063 149,004

The year-on-year rise in total assets as at 31 December 2019 is mainly attributable to the rise in

cash collateral provided for derivatives (EUR 5.5 billion), prepaid expenses (EUR 2.1 billion) and

the cash reserve (EUR 1.2 billion). The reduction in own issues repurchased (EUR 1.8 billion)

and the sale of DEPFA liabilities (EUR 1.2 billion), hybrid capital bonds (EUR 0.4 billion) and

TIER II loans (EUR 0.4 billion) had a partly offsetting effect. In addition, the liquidity facilities

extended to DEPFA BANK plc were undrawn as at 31 December 2019 (31 December 2018:

EUR 2.9 billion). The unwinding of a nominal EUR 5.0 billion of the portfolio was partly off-

set by additions attributable to the portfolio extensions in fiscal year 2019 (nominal value:

EUR 4.0 billion).

The description of the following balance sheet items includes any pro rata interest.



34


35

Receivables

As at 31 December 2019, loans and advances to banks mainly included cash collateral pro-

vided for derivatives of EUR 32.6 billion (31 December 2018: EUR 29.8 billion) and time

deposits of EUR 0.7 billion (31 December 2018: EUR 0.7 billion). As at 31 December 2018,

the item still contained amounts receivable from drawdowns on DEPFA liquidity facilities

(EUR 2.9 billion), acquired DEPFA liabilities (EUR 1.2 billion) and TIER II loans (EUR 0.4 billion).

As at 31 December 2019, the item included receivables with a nominal value of EUR 0.4 billion

acquired in the context of the 2nd portfolio extension of fiscal year 2019.

As at 31 December 2019, loans and advances to customers included cash collateral provided

for derivatives of EUR 4.3 billion (31 December 2018: EUR 1.6 billion) as a result of deriva-

tives clearing at Eurex Clearing AG, Eschborn, via clearing member the Federal Republic of

Germany, represented by the German Finance Agency. These additions attributable to the

portfolio extensions in fiscal year 2019 with a nominal value of EUR 0.6 billion were set against

the unwinding of a nominal EUR 1.2 billion of the portfolio.

Holdings of securities

Holdings of securities in the amount of EUR 80.3 billion were recognised as at 31 December 2019

(31 December 2018: EUR 82.1 bill ion). The own issues bought back in the amount of

EUR 14.8 billion (31 December 2018: EUR 16.7 billion) are allocated to the liquidity reserve

and partly pledged as collateral. The additional holdings of securities relate solely to market-

able debt instruments, which are classified as fixed assets (financial assets). The securities

holdings are largely hedged against interest rate and currency risk by means of derivatives.

The unwinding of a nominal EUR 3.8 billion of the portfolio and a decrease in own issues

repurchased of EUR 1.8 billion had the effect of reducing securities holdings. However, this

was partly offset by an increase attributable to currency effects of EUR 1.3 billion (of which

EUR 1.0 billion in relation to the nominal value of the wind-up portfolio) and additions attrib-

utable to the portfolio extensions in fiscal year 2019 with a nominal value of EUR 3.0 billion

as at 31 December 2019.

Shares and other non-fixed-income securities

Effective 26 May 2015, FMS-WM purchased a nominal EUR 1,125 million of DEPFA Group

hybrid capital bonds on the market at a price of EUR 675 million (excl. incidental acquisition

expenses). Back in 2018, an initial portion of these hybrid capital bonds was sold to the issuer,

DEPFA Funding IV LP, London.

During the fiscal year, FMS-WM sold the remainder of its holdings of hybrid capital bonds

issued by DEPFA Funding II and DEPFA Funding III to the issuer. As at 31 December 2019,

there was no longer a balance on the balance sheet item (31 December 2018: book value of

EUR 386 million).

Shares in affiliated companies and other long-term equity investments

The book value shown for shares in affiliated companies and other long-term equity invest-

ments was EUR 474 million as at 31 December 2019 (31 December 2018: EUR 493 million).

The decrease in the fiscal year is mainly the result of the repayment of a portion of FMS-SG’s

capital reserves in the amount of EUR 20 million to FMS-WM. Shares in DEPFA BANK plc

account for EUR 323 million (31 December 2018: EUR 323 million).



36

Liabilities

Issuing own bonds, raising funds via the FMS, raising funds through the Euro CP / CD Pro-

gramme 1 (ECP / CD Programme) launched in fiscal year 2011 and engaging in repos has a

significant impact on the following balance sheet items: Liabilities to banks, Liabilities to

customers and Securitised liabilities.

FMS-WM recognised liabil ities to banks of EUR 3.5 bil l ion as at 31 December 2019

(31 December 2018: EUR 10.0 billion). This mainly includes liabilities under securities repur-

chase agreements (as seller) with a nominal value of EUR 1.5 billion (31 December 2018:

EUR 8.1 bil l ion) and accrued interest for derivatives in the amount of EUR 1.0 bil l ion

(31 December 2018: EUR 1.2 billion).

Liabilities to customers totalling EUR 41.0 billion (31 December 2018: EUR 13.7 billion) mainly

included funding obtained from the FMS in fiscal year 2019 in the amount of EUR 25.0 billion,

l iabil ities from securities repurchase agreements (as seller) with a nominal volume of

EUR 13.1 billion (31 December 2018: EUR 9.5 billion) as well as time deposits of EUR 0.9 billion

(31 December 2018: EUR 2.2 billion).

In addition, FMS-WM recognised securitised liabilities of EUR 80.9 billion as at 31 December 2019

(31 December 2018: EUR 102.2 billion). The holdings of FMS-WM’s own debt issues as at

31 December 2019 were EUR 55.9 billion (31 December 2018: EUR 72.9 billion). This item also

includes EUR 25.0 billion (31 December 2018: EUR 29.3 billion) in commercial paper from the

ECP / CP Programme.

Prepaid expenses and deferred income

Prepaid expenses in the total amount of EUR 8.8 billion (31 December 2018: EUR 6.7 billion)

include the unamortised cost of derivatives in the amount of EUR 7.3 billion (31 December 2018:

EUR 4.9 billion). In addition to the payments made for interest rate derivatives when the port-

folio was taken over as at 1 October 2010, the item also includes the as-yet unamortised

payments made by FMS-WM to acquire interest rate derivatives in connection with the wind-up

task related to the DEPFA Group.

Another significant component of prepaid expenses are those from the lending business in

the amount of EUR 1.4 billion (31 December 2018: EUR 1.7 billion), consisting predominantly

of payments made by FMS-WM in 2010 for hedge adjustments of the hedged items (receiv-

ables) taken over from the HRE Group companies. Furthermore, prepaid expenses were

recognised for payments made in acquiring exposures (receivables) in the course of the port-

folio extensions.

Deferred income totalling EUR 18.3 billion (31 December 2018: EUR 16.4 billion) consists mainly

of EUR 17.6 billion (31 December 2018: EUR 16.3 billion) of unamortised payments received

for derivatives acquired. These derivatives were mostly acquired as at 1 October 2010 from

HRE Group companies and to a lesser extent in connection with the wind-up task related to

the DEPFA Group. Deferred income also includes deferred payments received in connection

with lending and funding operations.

1 Commercial Paper- / Certificates of Deposit-Programme.



36


37

Equity and loss compensation claim

The capital base of FMS-WM is structured as follows:

HRE and pbb each made an equity contribution of EUR 1 million to FMS-WM in connection

with the spin-off pursuant to Section 8a (1) and (8) FMStFG in conjunction with Sections 123 (2)

No. 1 and 131 UmwG.

FMS-WM recognised net retained profits of EUR 236 million as at 31 December 2019 (previ-

ous year: EUR 115 million).

Net retained profits from fiscal year 2018 in the amount of EUR 115 million were transferred to

retained earnings by decision of 29 March 2019. Retained earnings as at 31 December 2019

totalled EUR 1,513 million.

In accordance with the law and the Charter of FMS-WM, the FMS is under an obligation to

compensate all losses. Accordingly, until FMS-WM is liquidated, the FMS has the obligation to

pay, on first demand by the Executive Board of FMS-WM, all amounts required in the Executive

Board’s due assessment for ensuring that FMS-WM can pay all its liabilities at any time when

due and in full and to cover all losses of FMS-WM.

Below-the-line items on the balance sheet

As at 31 December 2019, contingent liabilities consisted predominantly of obligations under

credit default swaps (CDS) where FMS-WM is the guarantor. To a lesser extent there were also

guarantees for certain assets being held by companies of the former HRE Group that could

not be transferred to FMS-WM.

As at 31 December 2019, other obligations mainly included undrawn liquidity facilities, of which

EUR 0.8 billion was extended to DEPFA BANK plc. In addition, there was still an irrevocable

loan commitment of EUR 0.9 billion in respect of pbb, which decreased by EUR 0.1 billion

compared with 31 December 2018 as scheduled.

Financial position

Capital structure

Securitised liabilities totalling EUR 80.9 billion were recognised as at 31 December 2019 in

connection with FMS-WM’s own debt issues and the ECP / CD Programme (31 December 2018:

EUR 102.2 bill ion). As at 31 December 2019, FMS-WM issued EUR 55.9 bill ion in own

debt instruments (31 December 2018: EUR 72.9 billion); of this amount, EUR 14.8 billion

(31 December 2018: EUR 16.7 billion) were bought back and are reported as an asset in the

balance sheet under the Debt instruments item.



38

Financing measures

In the reporting year, FMS-WM met its targets for its funding and investor strategy. The over-

riding aim here is to ensure the solvency of FMS-WM at all times. This is accomplished by

means of a broadly diversified funding structure, which is characterised by product diversity

and a broad, international investor base.

In the money market, the product range comprises the following instruments:

▶ ECP / CD Programme

▶ USD Asset Backed CP Programme (via an issuance vehicle in the USA)

▶ Repos (bilateral, and Eurex repos)

▶ Deposits from institutional investors

The money market funding had an average remaining maturity of approximately 2.3 months

as at 31 December 2019 and consisted mainly of EUR, GBP and USD. Money market funding

is obtained at both fixed and variable rates of interest.

Capital market funding is based on strategic benchmark issues, publicly offered issues and

private placements. These three instruments primarily dif fer in issuance volume and market-

ing processes. FMS-WM still does not issue structured products but it can issue in dif ferent

currencies – primarily USD and GBP besides EUR.

The total issuance volume of all capital market instruments in fiscal year 2019 amounted to

an equivalent of EUR 5.0 billion, with issuance activities carried out in USD and GBP. As a

result, this financial performance indicator in 2019 met the volume of capital market issues

of EUR 5 billion to EUR 6 billion forecast in the management report as at 31 December 2018.

FMS-WM also obtained longer-term funding in euros of EUR 25.0 billion via the FMS in the

fiscal year ended. Further borrowings of EUR 5.6 billion are planned for the 2020 financial year.

The average maturity of the borrowings made on the capital market in 2019 was about

3.8 years, placed in dif ferent issue formats with a respective volume of up to USD 2.0 billion

and GBP 0.5 billion. At least one benchmark bond each was issued in USD and GBP. Borrow-

ings raised via the FMS in the fiscal year ended had an average maturity of around 5.5 years

as at 31 December 2019.



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39

The capital market funding in place as at 31 December 2019 (without taking into account own

bonds) and the funds obtained via the FMS show the following maturity structure:

Maturities 31.12.2019


in EUR million

up to one year 19,252 20,780

More than one year and up to five years 36,945 34,589

More than five years 11,320 2,291

Total 67,517 57,660

The movements in the maturity structure are mainly the result of raising longer-term funding

in euros through the FMS.

If capital market funding or borrowings via the FMS are obtained at a fixed rate of interest,

FMS-WM usually hedges the funding or borrowings by way of appropriate interest rate hedges

as part of general interest rate management.

FMS-WM plans to keep the proportion of long-term funding (on the capital market and through

the FMS) in the overall funding volume at around 50% (currently: approx. 63%).

Liquidity

FMS-WM had sufficient liquidity at all times, and in future will continue to have access to the

money and capital markets as well as the option to borrow via the FMS, allowing maturing

funding to be replaced by new borrowings at any time, where this cannot be repaid by inflows

of funds from the wind-up of the portfolio.

Capital expenditures

In fiscal year 2019, FMS-WM acquired further DEPFA liabilities with a nominal volume of

EUR 0.1 billion.

Off-balance sheet obligations

Some of the outsourced services (inter alia FMS-SG, IBM Deutschland and DG FIS) are sub-

ject to long-term agreements, giving rise to other financial obligations on the part of FMS-WM.

These agreements have fixed and variable performance components. For the next three years,

a contractual volume of more than approx. EUR 100 million per year is expected, with an aver-

age of around 63% being attributable to FMS-SG over the next three years.

In respect of further off-balance sheet obligations, see the chapters entitled Contingent liabilities

and other obligations in the notes to the annual financial statements as at 31 December 2019.



40

Results of operations

The results of operations were shaped mainly by the current income and expenses gener-

ated from the portfolio and by the measures taken to unwind the portfolio and the valuation

decisions made in fiscal year 2019. At EUR 232 million (previous year: EUR 210 million), the

balance of current income and expenses (net interest and net commission income, income

from profit transfer and current income from other long-term equity investments, less gen-

eral and administrative expenses and depreciation / amortisation of tangible / intangible fixed

assets) was positive in fiscal year 2019. This includes income from a dividend payment dis-

bursed by the subsidiary Flint Nominees Ltd. in the amount of EUR 49 million. At EUR 23 million

(previous year: EUR –105 million), the balance from the Risk provisions and Net income from

investments items influenced by valuation decisions and sales results was positive in the fiscal

year. This includes a gain of EUR 233 million on the disposal of DEPFA Funding II and DEPFA

Funding III hybrid capital bonds.

In fiscal year 2019, there was a positive result of EUR 253 million (previous year: EUR 114 million)

from ordinary activities (after deducting the balance of other operating income and expenses).

Taking into account the tax expense of EUR 17 mill ion (previous year: tax income of

EUR 1 million), net income for the fiscal year is EUR 236 million (previous year: EUR 115 million).

The enumeration below provides an overview of the structure of the result from ordinary activ-

ities based on the items of the income statement.

Income statement

of FMS Wertmanagement for the period from 1 January until 31 December 2019

01.01. – 31.12.2019

in EUR million

01.01. – 31.12.2018

in EUR million

Net interest income 325 348

Current income from other long-term equity investments 49 0

income from profit transfer 1 3

Net commission income –5 4

Other operating income / loss, net –2 9

General and administrative expenses –138 –144

Depreciation and amortisation 0 –1

Risk provisions for the lending business –283 310

Net income from investments in the securities business 306 –415

Result from ordinary activities 253 114

Taxes (incl. other taxes) –17 1

Net income for the year 236 115

Retained profits / accumulated losses brought forward 0 0

Net retained profits 236 115



40


41

Net interest income

Net interest income in the fiscal year amounts to EUR 325 million (previous year: EUR 348 million).

The decrease compared to the previous year is mainly due from the year-on-year reduction in

one-off effects totalling EUR 19 million (previous year: EUR 32 million), which result from com-

pensation payments for contract adjustments to existing credit support annexes for derivatives.

As expected, excluding the aforementioned one-off effects, a year-on-year reduction in net

interest income from current operations was recorded in the fiscal year. This decline is mainly

due to the reduced portfolio volume.

Current income from other long-term equity investments

Current income from shares in affiliated companies results from a dividend payment disbursed

by the subsidiary Flint Nominees Ltd.

Income from profit transfer

In the fiscal year, FMS-WM generated net income for the year of EUR 1.4 million from the exist-

ing profit transfer agreement with FMS-SG (previous year: EUR 2.5 million).

Net commission income

Net commission income in the amount of EUR –5 million (previous year: EUR 4 million) pri-

marily comprises expenses from the derivatives and issuing business and commission income

from the lending and derivatives business. The decline in net commission income is due to the

unwinding of the portfolio and the resulting decrease in income from the lending and deriv-

atives business on the one hand and increased expenses from credit derivatives as a result

of hedging risk positions by means of CDS hedging transactions in the fiscal year ended on

the other hand.

Other operating income / loss, net

Other operating income and expenses of EUR –2 million (previous year: EUR 9 million) mainly

result from currency translation effects. The prior-year figure was mainly the result of net

income from portfolio management and currency translation effects.

General and administrative expenses /

Depreciation and amortisation of intangible and tangible fixed assets

The general and administrative expenses in the fiscal year amounted to EUR 138 million

( previous year: EUR 144 million).

The administrative expenses primarily comprise expenses incurred in the context of service

outsourcing (servicing of the portfolio, administrative and back office activities, IT services,

and accounting services).



42

Including all active service providers, expenses for servicing the portfolio totalled EUR 94 million

in the fiscal year (previous year: EUR 100 million), which is EUR 6 million below the compara-

ble expenses in the previous year.

Personnel expenses for the staff of FMS-WM in fiscal year 2019 were EUR 19 million (previ-

ous year: EUR 19 million).

The development of general and administrative expenses serves as a financial performance

indicator for FMS-WM with regard to the strategic goal of cost-effective servicing and manage-

ment. General and administrative expenses overall and expenses for the servicing of the port-

folio included in this figure both decreased year-on-year. This means that the forecast made

in the management report as at 31 December 2018 that administrative costs would decline

slightly as a result of the ongoing portfolio reduction was fulfilled.

Risk provisions and net income from investments

Net income from risk provisions in accordance with Section 340f (3) HGB and net income from

investments in accordance with Section 340c (2) HGB amounted to EUR 23 million in fiscal

2019 (previous year: EUR –105 million).

Expenses from valuation measures to cover risks from lending business were set against

income from the reversal of provisions for derivatives and a gain of EUR 233 million on the

disposal of DEPFA Funding II and DEPFA Funding III hybrid capital bonds.

Overall appraisal

Overall, fiscal year 2019 was a positive one for FMS-WM. The persistently favourable condi-

tions in many market segments were used to continue unwinding the portfolio.

Excluding the increase resulting from the portfolio extensions in fiscal year 2019, portfolio

wind-up (before foreign currency effects) in the fiscal year was EUR 5.0 billion 1. Including the

additions attributable to the fiscal year 2019 portfolio extensions, the portfolio was unwound

by EUR 1.0 billion. The reduction of EUR 7.0 billion forecast in the outlook for fiscal year 2019

was therefore not fully implemented. In addition to the unwinding of the portfolio, several secu-

rities positions were not sold, but were instead economically hedged by purchasing credit

derivatives in light of the strategy of unwinding the portfolio in a way that maximises value.

This was also the main reason why the wind-up of EUR 7.0 billion forecast in the outlook for

fiscal year 2019 was not achieved in full.

1 The reduction refers to the original wind-up portfolio and the portfolio extensions carried out.



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43

FMS-WM acquired additional DEPFA liabilities with a nominal value of EUR 0.1 billion in

fiscal year 2019. Purchased DEPFA liabilities amounted to a nominal EUR 1.2 billion as at

31 December 2018. During the fiscal year ended, FMS-WM sold DEPFA liabilities with a nom-

inal value of EUR 1.3 billion to DEPFA ACS and, in return, acquired exposures with a nominal

value of EUR 1.6 billion from DEPFA Group companies (“1st portfolio extension in fiscal year

2019”). In addition, FMS-WM sold TIER II loans of DEPFA BANK plc with a nominal volume of

EUR 0.4 billion to DEPFA BANK plc and sold the two hybrid capital bonds of DEPFA Funding

II and DEPFA Funding III with a nominal volume of EUR 0.6 billion to the issuers. In direct con-

nection with this, further risk positions with a nominal value of EUR 1.0 billion were acquired

from DEPFA Group companies (“2nd portfolio extension in fiscal year 2019”). During the fiscal

year ended, FMS-WM also acquired risk positions with a nominal value of EUR 1.4 billion from

DEPFA ACS (“3rd portfolio extension in fiscal year 2019”). In connection with the acquisition

of these exposures by FMS-WM, DEPFA BANK plc repaid drawdowns on liquidity facilities

extended by FMS-WM.

Results of operations exceeded the statement made in the outlook for fiscal year 2019,

which expected FMS-WM to at least break even. Current income from the portfolio was

EUR 232 million (previous year: EUR 210 million) higher than expenses from current operations.

The year-on-year increase is mainly attributable to the one-off effect of the dividend payment

disbursed by Flint Nominees Ltd. However, this was partly offset by the decline in net interest

income. In addition, risk provisions and net income from investments – both items influenced

by valuations – showed a positive balance of EUR 23 million in the fiscal year ended (previ-

ous year: EUR –105 million). This includes a gain of EUR 233 million on the disposal of DEPFA

Funding II and DEPFA Funding III hybrid capital bonds. FMS-WM recognised net income of

EUR 236 million for fiscal year 2019 (previous year: EUR 115 million).

FMS-WM had sufficient liquidity at all times. As regards issuance activities at FMS-WM, the

total issuance volume across all capital market instruments came to EUR 5.0 billion in the fiscal

year and thus met the issuance volume of EUR 5 billion to EUR 6 billion forecast in the outlook

for fiscal year 2019. FMS-WM also obtained longer-term funding in euros of EUR 25.0 billion

from the FMS.

In summary, the Executive Board considers the asset position, financial position and results

of operations of FMS-WM for fiscal year 2019 to be in order.



44

REPORT ON RiSKS AND OPPORTuNiTiES AND FORECAST REPORT

Risk report

The risk report has been prepared in accordance with the requirements of the Handelsgesetz-

buch – HGB applicable to large corporations and the supplementary provisions applicable

to banks.

The disclosures in the risk report take all risk positions into account, to the extent that FMS-WM

has beneficial ownership of them and thus bears the value at risk. In addition, the risk report

also shows exposures where the risks were not transferred directly for a variety of reasons but

instead by means of guarantees for instance. These disclosures do not distinguish between

on-balance sheet transactions (receivables, securities) and off-balance transactions (guaran-

tees, loan commitments, derivatives). All risks are presented net of risk mitigation techniques.

FMS-WM holds exposures from DEPFA BANK plc, which was taken over on 19 December 2014,

amounting to the book value of the equity investment, intragroup receivables such as liquid-

ity facilities and DEPFA liabilities. Since FMS-WM has no obligation to assume the losses

of the DEPFA BANK plc, the risk positions of DEPFA Group companies are not reported in

FMS-WM’s risk report.

BASiCS OF RiSK MANAGEMENT

Risk management is based on the wind-up plan and the risk strategy and is documented in

the Risk Manual. The key risk management functions and instruments were further refined in

2019. Aside from the sets of tools used to steer and monitor risk, this also includes review-

ing and adjusting, as necessary, approaches to management, limit setting and reporting in

respect of relevant adjustments of the German Minimum Requirements for Risk Management

(MaRisk) and the special nature of FMS-WM.

The risk strategy takes into account the requirements of Section 25a (1) KWG, Article 2 (4) of

the Charter and the relevant rules and regulations of MaRisk. Even though FMS-WM is not a

bank or a financial services institution as defined in the German Banking Act, to the extent

advisable, required or stipulated in the Charter it complies with the rules, regulations and

standards because its operations establish commonalities with such institutions. Extensive

exploratory talks were conducted between FMS-WM and FMSA, its legal regulator, prior to

foundation in respect of the applicable MaRisk rules and regulations.

Changes of the legal framework in the banking sector are reviewed for their relevance to

FMS-WM and applied insofar as necessary.

The risk strategy defines the frameworks, principles and goals for FMS-WM’s risk manage-

ment on which all business decisions must be based. It provides the foundation for manag-

ing and controlling different types of risk.

F i N A N C i A L R E P O R T / M A N A G E M E N T R E P O R T R E P O R T O N R i S K S A N D O P P O R T u N i T i E S A N D F O R E C A S T R E P O R T


44


45

The current risk strategy is derived from the aims of FMS-WM as set out in its Charter and

from the wind-up plan, which describes the business strategy and risk tolerance. Economic

efficiency, operational feasibility of all risk steering activities and ensuring cost-effective fund-

ing constitute additional requirements for reducing risk. The risk strategy, including individual

strategies for the five relevant risk categories of credit, market price, liquidity, operational and

other risks, is outlined in established written policies and procedures.

Because the capital adequacy requirements pursuant to the German Banking Act do not apply

to FMS-WM, the absence of any obligation to prepare an internal capital adequacy assess-

ment process to manage its business based on economic capital pursuant to MaRisk stand-

ards result inter alia in reduced requirements on FMS-WM’s reporting system compared to

financial institutions. Nevertheless, FMS-WM’s approach to risk management is designed

to avoid seeking recourse with the FMS under the latter’s obligation to compensate losses.

The wind-up plan and the risk strategy – including the underlying assumptions – are reviewed

on a regular basis (at least annually) and updated as necessary. Deviations from plan that are

identified in the wind-up report also determine the need for updates.

ORGANiSATiONAL STRuCTuRE OF RiSK MANAGEMENT

Responsibility for risk management rests with the Executive Board of FMS-WM, in particular

the CEO. The chart below shows the organisational structure of risk management:

units

Supervisory Board / Risk Committee of the Supervisory Board

Executive Board

Risk / Asset Liability Committee



46

Supervisory Board / Risk Committee of the Supervisory Board

The Supervisory Board monitors the Executive Board within the meaning of the Charter of

FMS-WM and has delegated risk-relevant topics to the Risk Committee of the Supervisory

Board. As far as loan and portfolio management are concerned, the Risk Committee of the

Supervisory Board serves as the latter’s approval body tasked especially with making decisions

on a case-by-case basis that are particularly relevant to risk, have major effects on FMS-WM’s

success or possess major strategic significance. It reviews and approves transactions and

measures, strategies and targets related to individual exposures in connection with unwind-

ing the portfolio and monitors relevant loan decisions. All members delegated for this purpose

by the Supervisory Board are entitled to vote.

Committee

The RALCO, which meets regularly and can be convened at short notice, has been established

at FMS-WM to support and advise the Executive Board as well as to make certain decisions.

The RALCO has the following tasks and responsibilities:

▶ As an operational credit decision-making body at management level of the FMS-WM, it makes

individual credit decisions for all asset classes that fall within the committee’s authority level.

It is also tasked with making decisions on measures related to individual exposures and

to propose transactions, strategies and objectives with regard to portfolio wind-up and to

monitor relevant portfolio decisions.

▶ It acts as a strategic control and information body at Executive Board level, which prepares

decisions with regard to adjustments to the wind-up plan, among other things.

▶ The Committee also serves the Executive Board as the central information, monitoring and

management body for strategic decisions on balance sheet structure, liquidity and market

risk positions, refinancing and hedging strategies, limits and methodological guidelines for

risk control and the management of all types of risk.

Units

The units listed below are mainly responsible for risk management at FMS-WM.

The Risk Controlling department within the Risk Controlling & Quantitative Analytics unit is

responsible for carrying out all risk controlling activities in accordance with MaRisk for all risk

types. This includes identification, analysis, assessment, monitoring and reporting of the risks.

In addition, the Quantitative Analytics department reviews the adequacy of the models used to

determine credit risk and model-based market price valuation. The Finance, Controlling & Port-

folio Steering unit is responsible for updating FMS-WM’s wind-up plan on an annual basis.

The monthly wind-up report represents the centralised reporting system for all risk types.



46


47

Credit risk management is one of the main tasks performed by FMS-WM and the responsi-

bility of the Asset Management unit. The main tasks of the asset management departments

entail monitoring borrower and issuer risks and making decisions on loans and securities at

both the individual and the portfolio level. This is where the decisions of the RALCO whether

to sell or restructure risk positions are prepared and carried out.

The Asset Management unit comprises three teams with responsibilities based on segments

or product groups:

▶ The Infrastructure, Commercial Real Estate & Credit Office team primarily manages infra-

structure financing and real estate loans.

▶ The Public Sector, FI & Structured Products team handles both public-sector securities and

structured products.

▶ The Rome Branch team is responsible for FMS-WM’s Italian branch, which manages loans

to Italian Public Sector or Infrastructure borrowers.

The Group Treasury unit is responsible for operational management of market risk, especially

interest rate and foreign exchange risk, as well as the funding strategy and the associated tac-

tical and strategic liquidity management. As the Center of Competence for derivatives, the unit

also advises the asset management departments and conducts derivative-specific analyses.

The IT, Sourcing & Operations unit comprises the following three teams with corresponding

responsibilities:

▶ IT Steering & Project Planning: managing IT risk, monitoring and managing the contractu-

ally compliant provision of outsourced IT services, establishing appropriate guidelines and

processes, and monitoring the IT project portfolio.

▶ Sourcing & Servicer Steering: service provider management and managing outsourcing risks.

▶ Operations Management: managing operational back-office processes and the associated

risks.

Moreover, each individual department at FMS-WM must also manage the operational risks

falling within their own specific scope of responsibility. For example, ensuring adequate rules of

representation and carrying out measures to prevent losses are decentralised responsibilities.

In the reporting year, the Group Internal Audit unit performed risk-based and process-

independent audits relating to the efficacy and adequacy of risk management at FMS-WM

and on behalf of FMS-SG. In addition, Group Internal Audit examines processes and matters

implemented throughout the Group and complements the activities of the DEPFA Group’s

internal audit department.



48

PROCESS ORGANiSATiON OF RiSK MANAGEMENT

Risk management comprises the

▶ identification,

▶ analysis / assessment,

▶ steering and

▶ monitoring / reporting

of risks.

The material types of risk associated with FMS-WM’s business model are:

▶ Credit risks

▶ Market risks

▶ Liquidity risks

▶ Operational risks and

▶ Other risks

A regular risk inventory is conducted to identify and review risks classified as material. Due

to the size and complexity of the portfolio transferred, credit risk in the form of borrower and

issuer risk is the most important type of risk for FMS-WM. In addition, FMS-WM is subject

to considerable operational risk as a result of the extensive outsourcing of processes, and

considerable equity risk since the takeover of DEPFA BANK plc. Since the FMS is obliged to

compensate any losses, none of the risk types constitute a going-concern risk for FMS-WM.

Risk management also entails limiting, monitoring and actively steering the following risks in

particular: counterparty, market and liquidity risks. In addition to risk type-specific stress tests,

cross-risk type stress scenarios are run and reported on quarterly. Borrower and issuer risks

are monitored and managed as part of the wind-up strategies for specific wind-up clusters

within the segments. Counterparty, market, liquidity, operational and other risks are managed

at the portfolio level of FMS-WM.

FMS-WM is fully liable for managing and monitoring each individual risk type. FMS-WM has

outsourced significant operating duties and activities to FMS-SG by way of a framework agree-

ment. The scope of services provided is set out in detailed service level agreements.

Moreover, a framework agreement was signed to outsource key areas of IT operations to IBM

Deutschland and DG FIS. Extensive service level agreements safeguard IT system function-

ality, also providing for future adaptation of the systems to the special needs of FMS-WM by

means of change requests.



48


49

CREDiT RiSKS

Definition

The credit risk of FMS-WM mainly comprises borrower and issuer risk, counterparty risk as

well as country risk.

▶ Borrower and issuer risk comprises the risk that a contracting party, or a reference entity

in the case of credit derivatives, does not fulfil the payment obligations resulting from loan

agreements or securities issues in full or in a timely manner or that a credit event defined in

derivative contracts occurs. Borrower and issuer risks are distinguished as follows:

— Default risk: The risk that a borrower cannot fulfil payment obligations in full or on time

or that a defined credit event occurs and that FMS-WM suffers a financial disadvantage

as a result. In many cases, FMS-WM is in possession of marketable collateral to which

it has recourse in case of default. The liquidation of such collateral may be subject to

uncertainties, however.

— Migration risk: Risk that a borrower’s or issuer’s creditworthiness might deteriorate over

time. The deterioration in creditworthiness does not immediately result in direct losses,

but it increases the risk of incurring such losses in future. At the portfolio level the dete-

rioration is reflected in the rating profile. Irrespective of the required or actual treatment

for accounting purposes, a deteriorated credit profile is usually associated with declin-

ing market values.

▶ Counterparty risk is the risk that a contracting party’s default makes it impossible to fully

collect unrealised profits from derivatives and executory contracts. Counterparty risk is

distinguished as follows:

— Replacement risk: If a derivative counterparty defaults, a contract must be replaced

at conditions that are less favourable than the ones applicable when the contract was

initially made.

— Settlement risk: FMS-WM delivers an asset that it has sold to a counterparty or makes

a payment but does not receive the stipulated monetary amount or asset in return for

that delivery.

— Credit valuation adjustment (CVA): The risk that a counterparty’s creditworthiness might

deteriorate, thereby reducing the positive fair value. Derivatives may only be entered into

to hedge risks if there is a credit support annex (CSA).

▶ Country risk comprises borrower, issuer or counterparty risks arising from the dependence of

the contracting party on the actions of foreign states or political or economic developments.

In particular, this includes the risk that a debtor cannot service its liabilities because

— the government or central bank of the debtor’s country cannot or will not make available

the foreign currency required for such repayment or prohibits repayment (transfer risk) or

— the currency of the debtor’s country can no longer be converted due to a serious dete-

rioration of the country’s economic or political situation (conversion risk).



50

Risk strategy

FMS-WM’s credit risk strategy entails to minimise losses by holding assets to maturity or wind-

ing them up as in a way that maximises its value. As a rule, taking on new lending business or

acquiring securities for other purposes than hedging risks is not stipulated in the wind up plan.

In accordance with the business strategy, selective new business is only permitted in individ-

ual cases for the cost-efficient reduction of risks from existing positions or equity investments.

Risk identification

A catalogue of early warning signs, which is coordinated with FMS-SG, is used to continuously

monitor risk exposures so as to ensure early identification of problem assets. Exposures are

then classified into Facilities in Focus, Watchlist, Restructuring and Workout – in that order –

if certain indications are present. Exposures are subject to increasingly intensified monitor-

ing – in that order – to ensure that risks are detected and steps aimed at reducing risk can

be initiated as soon as possible.

The guidelines agreed with FMS-SG for credit processes determine the requisite steps for

performing risk reviews and risk assessments as part of regular monitoring. Early warning

indicators as well as the credit processes are reviewed on a regular basis but at least annu-

ally by FMS-SG and coordinated with the responsible units within FMS-WM.

Risk analysis and assessment

Credit risk is measured using internal models that calculate the

▶ probability of default (PD) of receivables,

▶ expected amount of the receivable at the time of default (exposure at default, or EaD), and

▶ potential loss given default (LGD).

The models for determining these parameters are reviewed annually by FMS-WM. The expected

loss (EL) is calculated for a one-year horizon based on one-year PD, EaD and LGD. The EL is

calculated on a per-transaction basis and aggregated at segment and portfolio level.

In addition, the cumulative expected loss for a longer planning horizon and for the entire term

of the positions in the portfolio is calculated as a risk reference value for use in managing the

portfolio. Stress tests are conducted at both portfolio and segment level, and the unexpected

loss is quantified with the help of a credit portfolio model. In sensitivity analyses and both

historical and hypothetical scenario analyses, stress situations are modelled for the key risk

parameters PD and LGD, and their effects are measured on the cumulative EL.



50


51

Risk steering

The credit portfolio management units and departments listed in the section entitled Organisa-

tional structure of risk management are responsible for steering credit risks. Restructuring and

selling receivables are the two most important tools that are available to FMS-WM for steer-

ing borrower and issuer risks. Monitoring limits are set for borrower and issuer risks, and their

utilisation is measured and reported daily. The limits are reviewed regularly and as needed.

In managing the portfolio, FMS-WM generally bases its decisions on the long-term value of an

exposure (intrinsic value) in order to decouple decision-making from short-term fluctuations in

market values. Changes in market values, however, are considered within internal credit rating

analyses because they can provide timely and independent indications of creditworthiness.

Additional analyses regarding borrower and issuer risk and potential write-down requirements

are also performed in the event of material market value changes.

Counterparty risks are managed by means of limits and application of the “gross future

exposure” approach, which does not only take current market values and collateral received

or granted into account, but also the potential future changes of derivatives’ market values.

Both replacement and settlement risks are managed by FMS-WM. As a rule, transactions

entailing a counterparty risk may not be made without a sufficient borrower-specific limit.

The extent to which the limit has been utilised must be verified before any new transaction

takes place (“ predeal limit check”). All transactions are applied to the given borrower- specific

limits immediately.

Limiting and managing counterparty risks distinguishes between two customer groups:

▶ Counterparty risks involving customers in the portfolio: The transferred exposures also

include derivatives with customers in the portfolio. These derivatives are generally not

collateralised. New transactions may only be entered into in exceptional circumstances, for

example with the aim of stabilising the overall exposure. Therefore, limiting these risks is not

an activity performed for management purposes but solely for monitoring purposes, i. e. it

is intended to help Risk Controlling identify implausible increases in exposure. On a regular

or ad hoc basis, Risk Controlling has the portfolio service provider adjust these limits. It

becomes necessary to adjust limits in particular as transactions mature or in response to

changes in market conditions.

▶ Counterparty risks involving capital market partners: The Group Treasury unit enters into

money market transactions, derivatives and repos to manage the risk and liquidity positions

of FMS-WM. Managing these business activities requires limits that give the unit enough

flexibility while enabling Risk Controlling to carry out its monitoring duties. The activities are

restricted to a defined pool of counterparties (white list); they are typically collateralised and

are subject to an independent limit monitoring and escalation process by Risk Controlling.

Country risk provisions are recognised as generalised specific loan loss provisions.



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Risk monitoring and reporting

Pursuant to the current wind-up plan, borrower and issuer risks are primarily monitored at

portfolio level but also at the level of individual exposures, if necessary, and described in the

wind-up report to be prepared monthly – for the Executive Board among others. Further-

more, a detailed credit risk and stress test report for the Executive Board evaluates credit-

risk specific as well as integrated stress test scenarios once every quarter. This report is then

presented to the RALCO.

At the level of individual exposures, FMS-SG monitors credit risk via approved processes.

The migration of the ratings of the largest exposures is reported to the Executive Board in the

wind-up report. In addition, FMS-SG reports monthly on the development of the watchlist and

problem assets to the responsible asset managers at FMS-WM. Based on the data delivered

and their own analyses, the asset managers monitor the individual exposures for their seg-

ments with regard to the decisions required in the interest of economic value maximisation.

Counterparty limits and their utilisation at transaction level are also recorded in the daily

counter party risk report, monitored and reported to the Executive Board as well as to the

Group Treasury unit. An escalation process ensures timely reaction and communication to

the Executive Board if limits are exceeded.

Country risks are measured and reported quarterly.

Risk position

The portfolio of FMS-WM is managed through the Commercial Real Estate, Public Sector, Struc-

tured Products and Infrastructure segments. An exposure at default (EaD) is determined for

all portfolio segments based on uniform specifications. The EaD shows the potential amount

of the claim against the borrower irrespective of the latter’s credit rating and any risk provi-

sions already set up in that connection. Besides the current drawdown, the EaD also takes

into account the pro rata interest payments in relation to which a borrower may default before

an exposure is defined as having defaulted (maximum 90 days) as well as those loan commit-

ments which a borrower will still be able to draw on in future despite a significant deteriora-

tion in creditworthiness. The EaD of derivatives is defined as the sum of the current market

value (after accounting for collateral) and the product-specific add-ons, which constitute a

cushion for possible future market value increases.

The EL as an additional important short-term parameter for managing the portfolio is deter-

mined for the entire portfolio for a period of one year. The only risk positions exempted from

the determination of the EL are those for which a specific loss provision was already recog-

nised or which have an internal rating of 29 or 30.

The disclosures below correspond to the presentation of internal risk reporting in the wind-up

report.



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53

Breakdown of the EaD and the EL of the portfolio

Breakdown of the EaD and the EL of the portfolio (incl. customer derivatives and CDS) by

segment:

EaD and ELin EUR billion

Commercial Real Estate Public Sector

Structured Products Infrastructure

Total (excluding hedge

derivatives)

Hedge derivatives

(incl. collateral deposited with

banks)

31.12. 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018

EaD 1.2 1.5 43.9 44.3 25.0 24.3 13.9 13.7 84.0 83.8 3.7 2.5

EL 0.00 0.01 0.03 0.03 0.01 0.01 0.03 0.03 0.07 0.08 0.00 0.00

As at 31 December 2019, the EaD of the risk positions excluding hedge derivatives was

EUR 84.0 billion. This also includes exposures with an EaD of EUR 4.3 billion that were acquired

as part of the portfolio extensions in fiscal year 2019. These exposures belong to the Struc-

tured Products and Public Sector segments.

Compared with fiscal year 2018, the EaD of the portfolio increased by EUR 0.2 billion (0.3%)

due to the portfolio’s aforementioned extensions by EUR 4.3 billion in fiscal year 2019 as well

as currency effects. The unwinding of the portfolio through principal repayment or sales had

an offsetting effect. Sales primarily consisted of government bonds.

While the EaD of the portfolio (excluding hedge derivatives) rose by 0.2% year-on-year, the one-

year EL was down by around 13% to EUR 0.07 billion year-on-year as at 31 December 2019.

The portion of EL attributable to the portfolio extensions in fiscal year 2019 amounts to

EUR 0.001 billion. In relation to the EUR 83.0 billion EaD from loans and advances for which

specific loan loss provisions have not yet been recognised (internal rating classes 1 to 28),

this corresponds to a one-year expected loss rate of 0.08%. In addition to repayments, the

decrease in the EL of approximately EUR 0.01 billion is mainly attributable to sales.

Counterparty risks from hedge derivatives amounted to an EaD of EUR 3.7 billion as at

31 December 2019, up EUR 1.2 billion on the previous year. The increase is attributable, among

other things, to the assumption of derivatives as part of the wind-up of the DEPFA Group. The

one-year EL from hedge derivatives was at a similar level to the previous year at EUR 1 million.

Not included in the portfolio presented are the shares in affiliated companies, whose risks are

reflected in equity risk, and risk positions vis-à-vis pbb:

▶ Irrevocable loan commitment in the amount of EUR 0.9 billion in respect of pbb as part of

the agreed “Ersatzdeckungslösung” (substitute cover solution)

▶ Liquidity facilities extended to DEPFA BANK plc for

— an unsecured maximum facility of EUR 0.5 billion, no drawdown as at 31 December 2019

— a secured facility of EUR 0.25 billion, no drawdown as at 31 December 2019

▶ Purchased DEPFA liabilities with an EaD of EUR 0.03 billion



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Breakdown of the portfolio by currencies

EaD in EUR billion 1Commercial Real Estate Public Sector

Structured Products Infrastructure Total

31.12. 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018

EuR 0.3 0.5 30.8 30.9 4.6 2.9 1.0 1.2 36.7 35.5

uSD 0.4 0.5 2.3 2.5 19.3 20.5 0.5 0.5 22.5 24.0

GBP 0.5 0.5 9.3 9.3 0.5 0.3 10.2 9.9 20.5 20.0

Other FX 0.0 0.0 1.5 1.6 0.6 0.6 2.2 2.1 4.3 4.3

Total 1.2 1.5 43.9 44.3 25.0 24.3 13.9 13.7 84.0 83.8

1 Excluding hedge derivatives with an EaD of EUR 3.7 billion

Changes in exchange rates compared with 31 December 2018 had the overall effect of increas-

ing FMS-WM’s EaD by EUR 1.6 billion, the main reason being the appreciation of the pound

sterling (4.9%) and the US dollar (1.9%), which primarily affected the Infrastructure, Public

Sector and Structured Products segments.

Breakdown of the portfolio by internal rating classes (IR)



31.12. 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018

iR 1 – 7 0.0 0.0 20.1 19.2 17.6 16.8 1.4 1.1 39.1 37.1

iR 8 – 10 0.0 0.0 21.9 23.2 6.8 6.6 10.2 9.3 38.9 39.1

iR 11 – 13 0.0 0.0 1.8 1.7 0.5 0.8 1.8 2.7 4.1 5.2

iR 14 – 22 0.5 0.6 0.1 0.1 0.0 0.0 0.3 0.4 0.9 1.1

iR 23 – 27 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

iR 28 – 30 0.7 0.9 0.0 0.1 0.1 0.1 0.2 0.2 1.0 1.3

Total 1.2 1.5 43.9 44.3 25.0 24.3 13.9 13.7 84.0 83.8

1 Excluding hedge derivatives with an EaD of EUR 3.7 billion

The breakdown of the portfolio into rating groups did not change significantly year-on-year.

Overall, the percentage of investment grade financing (IR 10 and better) was up on the previous

year from 91% to 93%. The proportion of financing with an investment grade rating also rose

slightly by 2% in fiscal year 2019 due to the portfolio extensions in the year under review.

Non-investment grade financing (IR 11 to 30) was reduced by 21% due to sales and repay-

ments. The portfolio extensions for fiscal year 2019 in the Structured Products segment are

primarily assigned a rating of between 1 and 7. Roughly three-quarters of portfolio extensions

in the Public Sector segment are also allocated to rating groups IR 1 to 7. No risk position in the

portfolio extensions for fiscal year 2019 is rated worse than 11. With regard to the EaD of the

portfolio extensions for fiscal year 2019, 94% of the extensions have an investment grade rating.

Major shifts between rating groups due to rating migrations took place in the Infrastructure

segment. The biggest movement observed had an EaD of EUR 0.5 billion and shifted from

the IR 11 to 13 rating group to the IR 8 to 10 rating group.



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55

Breakdown of the portfolio by countries and regions



31.12. 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018

PiiGS 2 0.0 0.0 24.2 25.4 1.1 1.2 0.5 0.7 25.8 27.3

Of which italy 0.0 0.0 20.6 21.9 0.7 0.7 0.3 0.4 21.6 23.0

Of which Spain 0.0 0.0 2.8 2.6 0.4 0.5 0.2 0.2 3.4 3.3

Of which ireland 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.1 0.1 0.2

Of which Portugal 0.0 0.0 0.7 0.8 0.0 0.0 0.0 0.0 0.7 0.8

united Kingdom 0.5 0.5 8.8 8.7 4.5 4.5 10.4 9.8 24.2 23.5

Germany 0.2 0.3 0.4 0.6 2.8 1.4 0.1 0.1 3.5 2.4

Rest of Europe 0.1 0.3 8.9 8.1 0.4 0.0 0.2 0.3 9.6 8.7

uSA 0.4 0.4 0.0 0.0 14.4 15.3 0.5 0.5 15.3 16.2

Japan 0.0 0.0 0.2 0.2 0.0 0.0 0.0 0.0 0.2 0.2

Asia (excl. Japan) 0.0 0.0 0.2 0.2 0.0 0.0 0.2 0.2 0.4 0.4

Rest of world 0.0 0.0 1.2 1.1 1.8 1.9 2.0 2.1 5.0 5.1

Total 1.2 1.5 43.9 44.3 25.0 24.3 13.9 13.7 84.0 83.8

1 Excluding hedge derivatives with an EaD of EUR 3.7 billion 2 There is no exposure as regards Greece Allocation by country of the economic risk

The percentage of European borrowers remained virtually unchanged year-on-year at 75%

(previous year: 74%). The largest shares of the portfolio are still attributable to United King-

dom at 29% (up +1 percentage point from last year), Italy at 26% (down 1 percentage point)

and the USA at 18% (down 1 percentage point) of the portfolio volume.

The Commercial Real Estate segment primarily consists of f inancing of UK (EaD of

EUR 0.5 billion), US (EaD of EUR 0.4 billion) and German properties (EaD of EUR 0.2 billion).

The Public Sector segment comprises securities and loans with an EaD of EUR 43.9 billion.

Significant exposures exist in connection with Italian (EaD of EUR 20.6 billion) and UK bor-

rowers (EaD of EUR 8.8 billion). The Rest of Europe region accounts for financing with an EaD

of EUR 8.9 billion, including government bonds and loans in Belgium (EaD of EUR 2.3 billion),

the Netherlands (EaD of EUR 1.9 billion) and France (EaD of EUR 1.8 billion).

In the Structured Products segment with an EaD of EUR 25.0 billion, EUR 14.4 billion – or

58% – is attributable to the United States, with EUR 8.0 billion comprising FFELP student

loan securitisations and EUR 5.3 billion being accounted for by securitised receivables from

municipal borrowers. Furthermore, there are material risk positions totalling EUR 4.5 billion in

respect of borrowers from the United Kingdom, EUR 2.8 billion in respect of borrowers from

Germany and EUR 1.8 billion in respect of borrowers from Canada.

In the Infrastructure segment, around 75% of the segment’s EaD of EUR 13.9 billion – an EaD

of EUR 10.4 billion – is attributable to UK borrowers. Another infrastructure financing focal

point is Canada with an EaD of EUR 1.4 billion.



56

Breakdown of the portfolio by remaining maturities



31.12. 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018

Due 0.1 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.3

up to 1 year 0.1 0.7 1.2 1.5 0.5 0.3 0.0 0.0 1.8 2.5

1 to 5 years 0.5 0.1 4.1 4.9 2.9 2.9 0.5 0.6 8.0 8.5

5 to 10 years 0.4 0.3 4.6 4.8 3.7 4.3 0.8 0.8 9.5 10.2

10 to 20 years 0.1 0.1 21.7 17.2 11.0 9.9 2.8 2.4 35.6 29.6

20 to 30 years 0.0 0.0 5.9 9.2 6.6 6.3 4.4 4.0 16.9 19.5

More than 30 years 0.0 0.0 6.4 6.7 0.3 0.6 5.4 5.9 12.1 13.2

Total 1.2 1.5 43.9 44.3 25.0 24.3 13.9 13.7 84.0 83.8

1 Excluding hedge derivatives with an EaD of EUR 3.7 billionRemaining maturities in years (time at which the next adjustment of terms will be made)

The remaining maturities of risk positions differ greatly depending on the segment. The risk

positions held in the Commercial Real Estate segment are usually due in less than five years.

8% of the segment concern called loans with an EaD of EUR 0.1 billion, while other risk posi-

tions with an EaD of EUR 0.1 billion will fall due in 2020.

In contrast, over two-thirds of the infrastructure loans have a remaining term of more than

20 years. Infrastructure financing with an EaD of EUR 5.4 billion has a remaining term of more

than 30 years. This relates mainly to inflation-indexed securities issued by UK utility compa-

nies, which are instruments whose EaD is expected to increase over time.

Of the receivables from borrowers in the Public Sector and Structured Products segments,

financing with an EaD of EUR 12.3 billion (28%) and EUR 6.9 billion (28%), respectively, will

become due in more than 20 years. The increase in the remaining terms of 10 to 20 years in

the two segments results from the portfolio extensions in fiscal year 2019 on the one hand

and from passage-of-time effects on the other.

Watchlist and Problem Assets

EaD in EUR billionCommercial Real Estate Public Sector


31.12. 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018

Watchlist assets 0.0 0.0 0.3 0.3 0.3 0.3 0.5 0.6 1.1 1.2

Problem assets 0.7 0.9 0.2 0.2 0.1 0.2 0.2 0.2 1.2 1.5

Restructuring assets 0.6 0.7 0.2 0.2 0.1 0.2 0.1 0.1 1.0 1.2

Workout assets 0.1 0.2 0.0 0.0 0.0 0.0 0.1 0.1 0.2 0.3

Total 0.7 0.9 0.5 0.5 0.4 0.5 0.7 0.8 2.3 2.7

Risk positions are classified as Watchlist Assets if the payment is delayed for more than 60 days

or if another specified criterion triggers intensified monitoring of the given risk position.



56


57

The “Restructuring Assets” category contains risk positions for which specific loan loss

provisions were recognised as well as risk positions that have defaulted according to the

Basel III criteria (e. g. payment past due > 90 days).

“Workout Assets” comprise risk positions where a restructuring seems unfeasible, where

legal action has been initiated and where a specific loan loss provision has been recognised.

“Restructuring Assets” and “Workout Assets” are combined in the “Problem Assets” category.

The decline in watchlist and problem assets exposures by EUR 0.4 billion, or 15%, is mainly

due to repayments and sales in the Commercial Real Estate segment. Only around 3% of

the portfolio exposure is managed as watchlist or problem assets in non-performing loan

management and is therefore monitored more closely.

The early warning system is designed to identify and closely monitor borrowers of FMS-WM

whose credit or collateral quality might deteriorate. Non-performing risk positions where the

arrears exceed 90 days are assigned to the non-performing loan management (i. e. Restruc-

turing, Workout). This involves testing for impairment at regular intervals and upon occurrence

of certain predefined events (“trigger events”) to determine the need for write-downs. If this is

the case, a proposal for specific loan loss provisions is prepared and submitted for decision

to the relevant committee.

The amount of the general loan loss provisions is determined based on the EaD and by

considering the probability of default (PD) and the loss given default (LGD).

Major challenges arising from credit risks

FMS-WM has assumed large risks by taking over the portfolio effective 1 October 2010 and

extending the portfolio in the past four fiscal years. These risks can lead to further recourse

to the FMS’s loss compensation obligation and therefore to additional burdens on Germany’s

federal budget. The most important of these risks are:

▶ Portfolio concentration: The EL of a portfolio shows the expected value of the credit losses

occurring within a specific forecast horizon as the result of the default risks to which the

portfolio is exposed to. However, actual losses may deviate considerably from this. The

greater the concentrations in the portfolio, the greater the danger that actual losses will

dif fer significantly from the average losses expected. The portfolio shows high concentra-

tions, particularly in relation to Italy and the United Kingdom.

▶ Long maturities: Around 88% of the risk positions have a remaining maturity of more than

five years, and 77% will not be due for more than ten years. A total of 14% have a remain-

ing maturity of over 30 years, and many of these are inflation-indexed securities for which

the exposure is expected to grow over time.



58

▶ Risks of hedging transactions: FMS-WM’s risk strategy stipulates broad hedging of the

portfolio against market risks, such as interest rate, foreign exchange or inflation risks. In

the event of default of the underlying credit risk positions, substantial additional losses can

arise from the associated market risk hedging transactions.

▶ Financing structures: The financial and economic crisis has fundamentally changed the

credit and capital markets. A significant number of FMS-WM’s risk positions comprise

exposures that were liquid at one time but have turned out to be illiquid since the crisis. To

make matters worse, in some market segments overall positive earnings contributions for

FMS-WM are hardly realistic any longer, even in view of the currently extremely favourable

funding options, since the margins agreed at the time of entry into the agreement no longer

correspond to today’s expectations of default for the risk positions.

If one or more of the aforementioned risks should materialise, this may have a significant impact

on the risk provisions to be recognised under commercial law. As a rule, FMS-WM recognises

specific loan loss provisions only on risk positions that are either already non-performing or

where full repayment at maturity is no longer to be expected from today’s vantage point. The

adequate amount of the specific loan loss provisions for risk positions where FMS-WM expects

to liquidate the provided collateral is determined by discounting the expected proceeds from

collateral disposal using a risk-free interest rate. General loan loss provisions are recognised

for potential default risks based on the EL for a one-year forecast horizon. Furthermore, country

risk provisions are recognised as generalised specific loan loss provisions for selected coun-

tries to address transfer and conversion risks.

MARKET RiSKS

Definition

Any decrease of the value of the risk positions due to changed market conditions and market

price factors gives rise to market risks. The following types of market risks are relevant to

FMS-WM:

▶ Interest rate risk: This risk concerns the change in the present value of risk positions due

to changes in the respective market interest rates.

▶ Foreign exchange risk (FX risk): This risk results from a change in foreign exchange rates

and indicates how the given change will affect the value in euros of an FX exposure.

▶ Credit spread risk: This risk concerns the change in the present value in the event of changes

in the underlying CDS or credit spread curve.



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59

▶ Other market risks mainly encompass

— Basis risk: Basis risk, such as foreign exchange or interest rate basis risk, can arise when

transactions are financed with mismatches in currencies and / or terms and when refer-

ence interest rates for variable-rate transactions differ.

— Inflation risk: Inflation risk describes the change in the present value of products whose

interest or principal payments are linked to certain national or regional consumer price

indices (inflation rates).

According to the current risk profile, the key market risk factors relevant for FMS-WM’s risk

management are interest rate risk and foreign exchange risk.

As previously, FMS-WM is not exposed to equity and commodity risks. Market liquidity risk is

not considered material as fire sales at unacceptable prices can be largely ruled out. This is

due to the funding opportunities available and the obligation of the FMS to supply FMS-WM

with liquidity in a crisis situation.

Risk strategy

Market risks may not be entered into purely based on a profit motive, but instead only with

the aim of winding up existing risk positions or avoiding new risk positions from arising. This

limits possible fluctuations in portfolio value.

The objective of the market risk strategy is to minimise the fluctuations in the fair value and

profit / loss of the asset portfolio induced by market risk factors. The accounting and the

income statement according to the standards of the Handelsgesetzbuch – HGB are relevant

in this context. The ratio of the expenditure required for hedging purposes to the realisable

benefits must be commercially reasonable. The goal is to unwind the existing risk positions

and avoid new ones.

To support the wind-up strategy and if requested by asset management, hedging derivatives

can be unwound at a point in time unrelated to the sale of the risk position, so as to increase

the flexibility of planned restructuring and wind-up activities. In a way identical to that used

for the rest of the portfolio, the interest rate risks of the risk exposures from approved wind-up

strategies are identified, measured, limited strictly and separately, and reported daily as a

separate item. The approved wind-up strategies are monitored by the responsible asset

managers and reported on regularly (at least quarterly) to the Executive Board.

For all activities of Group Treasury, the principle applies that Group Treasury can trade within

the previously set limits without further restrictions. Its market units are responsible for the

operational management of open positions; Risk Controlling is responsible for monitoring;

and the RALCO is responsible for setting limits and establishing principles in connection with

risk steering.



60

Risk identification

Market risks exist because of the structure of the portfolio, particularly in the form of interest

rate and foreign exchange (FX) risks. The risks arising from changes in credit spreads are

monitored in current reporting, but due to the wind-up task they are not limited. Recognition

of all third-party securities using the moderate lower-of-cost-or-market principle prevents an

increase in credit spreads from having a direct impact on profit or loss as long as an impair-

ment is not permanent and FMS-WM holds the given securities to maturity.

The daily data deliveries of FMS-SG as well as the information available in the IT systems along

with current market data serve as the basis for identifying the market risks.


Interest rate risks are measured using sensitivity analyses, i. e., the effects of a shift in interest

rate curves by a basis point, at the net present value of the relevant risk positions. Separate

analyses by maturity ranges enable FMS-WM to perform more extensive analyses of interest

rate risks besides their sensitivity to a parallel shift, e. g. when the curve turns. Besides the

detailed analysis by maturity range, separate assessments by currency are also performed to

take into account that every currency has a different interest rate curve. In measuring inter-

est rate risk, FMS-WM takes into account neither the margin components of cash flows nor

credit spreads when discounting.

With the aim of keeping fluctuations in parameters relevant to income to a minimum, the on-

balance sheet foreign currency position is determined, analysed and controlled on a monthly

basis. In addition, foreign exchange risks are analysed based on sensitivities via a change in

the net present value (NPV) in case of changes in exchange rates by 1% relative to the euro.

Credit spread risks are discounted based on the current credit spreads. The parameter used

in this case is the change in the NPV for credit spread changes by one basis point.

Suitable quarterly stress tests based on hypothetical but plausible and historic interest rate,

foreign exchange and credit spread scenarios complement risk measurement and analysis

based on sensitivities. These stress scenarios encompass, among others, scenarios similar to

those proposed by Deutsche Bundesbank. Aside from these scenarios arising from changes

in each type of market risk, FMS-WM also analyses the extent of the change in the net present

value of the portfolio if extreme historical or hypothetical market shifts were to occur for all

types of market risk.



60


61

Risk steering

The Group Treasury unit opens risk positions only to a limited extent and subject to the exist-

ing limits for purposes of risk steering. This is particularly necessary for short-term liquidity

management, which can expose FMS-WM to short-term interest rate risks, for example. The

management of interest rate and foreign exchange risks may give rise furthermore to a limited

amount of open risk positions subject to the existing limits. For reasons of efficiency, risk

positions are not effectively hedged unless they reach certain transaction volumes in order to

avoid price surcharges due to smaller transaction volumes or short-term market distortions.

In steering market risks, write-downs are recognised appropriately for risk positions.

The Asset Management and Group Treasury units may only utilise approved financial instru-

ments for hedging the risk positions.

Interest rate risks are managed using a limit system for interest rate sensitivities per currency

and maturity range, including an escalation process for limit breaches.

For interest rate risks from risk positions whose hedging derivatives were unwound pursu-

ant to a wind-up strategy at a point in time unrelated to the sale of the risk position, separate

limits are determined on submission of the wind-up strategy for the relevant portfolio. Risk

Controlling monitors these strict limits within the approved range. Reviews of the wind-up

strategies are conducted at least quarterly and include the management of interest rate risks.

Management is handled by the Group Treasury unit in accordance with the stipulations from

the wind-up strategies.

The approach to managing the foreign-currency position is based on managing the on- balance

sheet FX position calculated monthly such that the effects of fluctuations from changes in

FX rates on income are as low as possible. To this end, specific limits are defined per primary

currency along with a limit for secondary currencies and an escalation process. The limits are

monitored based on the previous month’s on-balance sheet foreign-currency position as well

as postings of FX transactions that are relevant to the balance sheet and have occurred in the

interim. FX sensitivities are additionally calculated and monitored on a daily basis. Significant

changes trigger a root cause analysis in order to ensure that any foreign-currency position

relevant to the balance sheet can be hedged if necessary in a timely manner.

The risks from changes in credit spreads are not limited, since the task is to unwind the port-

folio taken over in a way that maximises its value – including the portfolio extensions. These

risks are managed by Asset Management as part of the portfolio wind-up.



62


Market risks may not exceed sensitivity limits in the daily risk management process. Limits

are monitored based on the daily market risk report that is prepared by FMS-SG and analysed

by FMS-WM’s Risk Controlling department. The report, which also includes the credit spread

sensitivities, is made available to both the Executive Board and the Group Treasury unit on a

daily basis. The defined review and escalation process applies whenever limits are exceeded.

In the event of the approved limits for exposures from wind-up strategies being exceeded, the

measures defined for this event by the adopted strategies are triggered.

Additionally, market risks are regularly reported in the RALCO and as part of the monthly

wind-up report to the Executive Board. The Supervisory Board is also informed about market

risks on a quarterly basis via the wind-up report.

Risk position

The main factors affecting interest rate sensitivities are exposures in assets and liabilities with

fixed interest rates where the interest rate risks are hedged largely through interest rate deriva-

tives. As determined based on the method applied, the portfolio’s interest rate sensitivity as at

31 December 2019 was EUR –0.45 million (31 December 2018: EUR 0.42 million). This means

that the present value of the portfolio would decrease by EUR 0.45 million in case the interest

rate curves of all currencies rise by one basis point simultaneously. Material interest rate sen-

sitivity exposures concern the euro in the amount of EUR –0.50 million (31 December 2018:

EUR 0.37 million). The change in interest rate sensitivity is largely due to positions in the short-

term maturity range. The positions from approved wind-up strategies entail additional risks of

EUR 0.19 million as at 31 December 2019 (31 December 2018: EUR 0.10 million).

On all trading days in fiscal year 2019, interest rate sensitivity lay within a bandwidth of

EUR –0.45 million to EUR 0.60 million. The interest rate sensitivity of exposures from agreed

wind-up strategies ranged from EUR 0.10 million to EUR 0.19 million.

Given the stress scenarios defined for interest rate risks, a flattening of the curve amid a

general increase in interest rates would have the greatest negative impact of EUR –135 million

on the present value as at 31 December 2019. This compares to an impact of EUR 105 million

as at 31 December 2018. The change in the impact of this scenario results from the change

in interest rate exposures, mainly in the short-term maturity range.

Foreign exchange risks are managed based on the balance sheet position and the derivative

hedging positions subject to compliance with the fixed limits. The open FX position based at

31 December 2019 amounted to EUR 4.4 million for all currencies. The FX position shown in

the balance sheet is closed to an extent that enables compliance with the approved limits.

Stress scenarios are calculated comparable to the FX sensitivities that are determined on a

daily basis. Given the defined FX stress scenarios, an increase by 15% in the value of the euro

against all other currencies would have the greatest negative impact of EUR –6 million on the

net present value (31 December 2018: EUR –32 million).



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63

Since interest rate exposure in the portfolio is largely closed, any future changes in interest

rate curves will only minimally influence the value of FMS-WM’s portfolio.

Inflation risks – as an aspect of market risks – are still deemed to be minor. Most of them are

hedged. Inflation sensitivities are low and remain relatively constant.

LiQuiDiTy RiSKS

Definition

FMS-WM distinguishes between tactical and strategic liquidity risks:

▶ The tactical liquidity risk concerns the risk of not being able to generate sufficient cash on

short notice such that present or future payment obligations may not be fulfilled at all or not

in full when due under the contract.

▶ Strategic liquidity risk is the risk of being able to implement the necessary measures described

in the funding strategy in the market only at greater expense. An unexpected rise in fund-

ing costs might result from general market distortions or idiosyncratic events, for instance.

Risk strategy

The liquidity risk strategy aims to ensure that FMS-WM is solvent at all times, even under

stress conditions. To ensure that this is the case, FMS-WM holds highly liquid, ECB-eligible

assets in the form of own and third-party bonds, which, indirectly through securities repur-

chase agreements, represent a sufficient liquidity reserve, and also limits daily net cash out-

flows of the next ten days (net cash position) to no more than EUR 2 billion. Furthermore,

an average remaining maturity of at least 90 days is targeted for money market instruments.

In addition, FMS-WM diversifies its funding in terms of the investor base, maturities (money and

capital market), product range (secured and unsecured products and programmes), markets

(e. g. countries) and currencies. FMS-WM establishes extensive and original access to foreign

currency funding (in particular in USD and GBP) and is able to tap liquid FX markets (FX spot

and FX derivatives) at all times.

The FMS has been providing longer-term funding in EUR since the start of 2019. When obtain-

ing liquidity, FMS-WM ensures that its credit rating is not adversely affected. Within this frame-

work, FMS-WM optimises its liquidity costs.



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Risk identification

To identify the tactical liquidity risk, the liquidity maturity profile is

▶ analysed for each maturity range based on different scenarios and then compared to the

liquidity cushion, and

▶ analysed by product group and compared to the internal control limits imposed by Group

Treasury.

Strategic liquidity risks are identified by way of an analysis of the expected funding costs based

on the long-term funding structure and the expected cash outflows in accordance with the

assumptions under both the wind-up plan and the funding plan.


Analysing the tactical liquidity risk requires determining the liquidity position by means of the

maturity profile of all assets and liabilities (gap profile), which is based on the 24-month fore-

cast for three components:

▶ Contractual cash inflows and outflows including nostro account balances

▶ Assumptions with respect to

— extensions of available assets,

— drawdowns from credit lines granted,

— availability of the funding instruments, and

— liquidity effect of market scenarios (including interest rate, FX and credit spread scenarios).

▶ Liquidity reserve encompassing liquid, free securities eligible for ECB funding purposes

In terms of assumptions, FMS-WM analyses two scenarios in its daily risk report whose meth-

odology reflects the special situation of FMS-WM. Both scenarios include the normal case as

the basic assumption and a “global financial market crisis” as the stress scenario.

Monthly back-testing enables regular reviews of the adequacy of the assumptions in the

scenarios. During this process, the projected liquidity position is compared with the actual

liquidity position. The assumptions for the normal case and the stress scenario remained the

same as in the previous year.

The strategic liquidity risk is determined by analysing the deviation of the actual funding

volume from the funding plan, the deviation of the funding costs from the funding plan as well

as funding concentrations. Building on this, a quarterly analysis of the effects of an increase

in FMS-WM’s own funding cost rate on net interest income is carried out.



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Risk steering

The tactical liquidity is managed by Liability Management in the Group Treasury unit, which

is responsible for ensuring the availability of short-term liquidity at any time. Secured and

unsecured money market instruments are available to this end based on the approved product

catalogue.

Strategic liquidity is also ensured by the Group Treasury unit. Group Treasury prepares the

long-term funding strategy and its derived funding plan. The funding plan is implemented by

using direct access to the capital market via issues of securities and by obtaining funding via

the FMS with maturities of more than one year.

The one scenario that would significantly affect FMS-WM, given its funding structure, was

selected among the defined stress scenarios for the purpose of limiting liquidity risk. The

Global Financial Market Crisis scenario and a minimum survival period of 90 days were fixed

as the limit based on the experience of recent years. Within this period, the liquidity position

must be positive even under the premises of the defined scenario such that FMS-WM remains

solvent at all times by realising its liquidity reserve.

The liquidity contingency plan fixes the actions that must be taken in the event of a liquidity

shortage.


The liquidity profile of FMS-WM is monitored daily and reported to both the Executive Board

and the Group Treasury unit. Risk Controlling monitors compliance with the limit on a daily

basis. The following escalation process is carried out in case of limit breaches:

▶ Group Treasury verifies the limit breach and gives its view of the expected duration of the

breach and the actions required to cure it.

▶ Risk Controlling comments on these measures and monitors their implementation.

▶ The Executive Board is notified immediately of the limit breach.

As long as the limit breach has not been cured, the Executive Board and the Group Treasury

unit are kept abreast daily of the degree to which agreed-upon steps have been implemented.

The RALCO is also informed of the limit breach as part of the regular reporting.

Independently of this, the liquidity position is reported monthly to the Executive Board and

quarterly to the Supervisory Board as part of the wind-up report.



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Risk position

In 2019, FMS-WM’s funding strategy was validated in the money and capital markets by a

stable and broadly diversified investor base.

FMS-WM’s issuing activity under the existing money market programmes, European Commercial

Paper (ECP / CD) and the US vehicle, Kells Funding LLC, Delaware, USA (US-ABCP), further

contributed to a stable and sustainable funding structure for FMS-WM in 2019. The average

remaining maturities of money market funding temporarily declined to less than three months

as a result of the long-term funding in EUR by the FMS.

After having established itself in recent years as a regular issuer on international capital

markets, FMS-WM placed capital market issues in USD and GBP equivalent to EUR 5.0 billion

in 2019. FMS-WM also obtained longer-term EUR funding of EUR 25.0 billion from the FMS

in 2019.

As at 31 December 2019, FMS-WM’s positive liquidity cushion is EUR 12.6 billion based on

the assumptions of the stress scenario, Global Financial Market Crisis, and pursuant to the

defined minimum survival period of 90 days (31 December 2018: EUR 11.8 billion).

OPERATiONAL RiSKS

Definition

Operational risks include all risks that can arise from the inadequacy or failure of internal

processes, employees, systems, or due to external events. The following operational risks are

of particular relevance for FMS-WM:

▶ Outsourcing risk: Refers to potential losses from the outsourcing of institute-specific activities

and processes to third parties. Aside from the default of the service providers, this also

includes the risk that services contracted for are not provided at all or not in the stipulated

quality or within the stipulated time.

▶ Project risk: Refers to the risk that FMS-WM cannot fulfil key functions and meet planned

goals for department-related and / or IT projects, or fulfil or meet these adequately, owing

to unsuccessful or late implementation, or implementation at higher than anticipated

project costs.

▶ IT risk: Denotes all risks to FMS-WM’s asset position, financial position and results of oper-

ations as a result of shortcomings related to IT management and IT steering respectively,

the availability, confidentiality, integrity and authenticity of data, the internal control system

of the IT organisation, the IT strategy, IT guidelines and IT aspects of the rules of procedure

or the use of information technology.

▶ Legal risk: Denotes the risk of losses arising from the deliberate and inadvertent breach of

applicable legal (including contractual) provisions, from the unenforceability of contractual

claims and from legal disputes generally.



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Risk strategy

The main objective is generally to prevent and reduce these risks and specifically in relation to

▶ outsourcing risk to ensure excellent performance by service providers and therefore oper-

ating stability as well as to guarantee profitable portfolio management,

▶ project risk to achieve the project objective on schedule and within the budgeted project

costs,

▶ IT risk to ensure a risk- and earnings-oriented approach to IT management addressing the

proper functioning of IT, the stability of the applications used and the data contained in the

applications,

▶ legal risk to involve the Legal & Group Compliance unit of FMS-WM at an early stage.

Risk identification

Operational risks at FMS-WM and likewise at FMS-SG are identified through the annual Opera-

tional Risk Self-assessment (ORSA), the documentation of operational risk events and possibly

resulting losses, and the Key Risk Indicators as early warning indicators required to be captured

on a regular basis.

Given the considerable significance of outsourcing risk, FMS-WM has set up a competence

team in the Sourcing & Servicer Steering team that is dedicated to managing and monitoring

outsourcing. The relevant departments / units participate in identifying risks concerning the

outsourced activities and processes.

Project risks are identified in a two-step process by which risks are reported and recorded

by the project manager in question. On certain projects, a risk database is used to perform

a full risk identification.

IT risk is identified by means such as error logs in the event of the unavailability of or inter-

ruptions to IT systems. The internal control system and the IT controls defined there are also

used in the process.

Legal risks due to changes in the existing legal environment are identified by the units on

the basis of a tool that receives information from the Association of German Public Banks

( Bundesverband Öffentlicher Banken Deutschlands).



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Operational risks at FMS-WM and at FMS-SG are analysed and assessed

▶ ex post via the recorded relevant operational (loss) events in the common event / loss data-

base within the common operational risk workflow tool,

▶ ex ante via the results of the standardised ORSA conducted each year, which includes

estimating the frequencies of occurrence and potential losses in a common operational

risk workflow tool,

▶ and by analysing agreed early warning indicators.

The Sourcing & Servicer Steering team analyses and then assesses outsourcing risk as part of

the risk analyses in conjunction with the affected departments / units and with Group Internal

Audit and Risk Controlling. In this context, the first step is to classify the outsourced activities

according to materiality using a structured questionnaire with risk assessments. Additional

risk analyses and assessments are carried out for material outsourcing activities. These risk

analyses are updated as necessary but at least once a year. If material risks are identified, the

affected unit is required to document the risk immediately in the ORSA. Non-material risks are

recorded in the course of the annual ORSA.

The risk in respect of relevant projects is analysed and assessed based on evaluations of the

project risk’s probability of occurring and its potential impact using defined scales. Combining

the two parameters yields an overall assessment that entails classifying each individual pro-

ject risk into a risk matrix. Based on specific combinations risks are classified as low, high or

critical. Analysing and assessing the risks is the job of the project manager, who determines the

criticality of the risks depending on their degree of influence on the major goals of the project.

IT risks are identified using methods such as searching a catalogue of risk types to determine

permanent and ad-hoc risks arising from the operation of IT applications. In the event of the

unavailability of or interruptions to IT systems, error logs are also analysed and incorporated

into the overall IT risk situation. IT risks are analysed, assessed and consolidated on a regular

or ad hoc basis by the IT-Retained organisation within FMS-SG that is responsible for tasks

such as controlling IT outsourcing.

The legal risks of a transaction are analysed and assessed by staf f brought in from the

Legal & Group Compliance unit, if necessary with the involvement of external law firms. General

legal risks arising from changes in the legal environment are analysed and assessed by the

unit responsible for the relevant requirements.



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Risk steering

For potential operational risks classified as critical in the ORSA, action plans and measures

must be agreed and implemented that serve to reduce the loss amount and / or the probability

of occurrence. The measures are documented in the Group-wide operational risk workflow

tool. These risks are managed by FMS-SG or by the affected team of FMS-WM in accordance

with assigned responsibilities. A contingency plan has been defined for all business- critical

processes as an operational risk mitigation measure within FMS-WM. The new- product process

(NPP) serves to lower risks from operating new products, for example.

Outsourcing risk is steered by agreeing qualitative performance indicators and by requesting

regular assessment of the end products from the recipients of these deliverables. The assess-

ments factor in timeliness and quality, and are documented in service management software.

The quality of performance is ensured by regular communication with the service providers

and through measures that are coordinated with them and monitored by FMS-WM. Escala-

tion processes that start with the responsible staff member and end with the Executive Board

have been defined for performance of the measures.

Project risks are managed by project managers using suitable risk-reducing measures which

are presented to the project steering committee for information purposes. The implementa-

tion and effectiveness of these measures is monitored.

IT risks are monitored using appropriate technical and manual controls. FMS-SG consoli-

dates and assesses IT risks and initiates or coordinates any risk mitigation measures with the

FMS-WM that go beyond controls.

FMS-WM uses clearly defined governance structures and processes to manage legal risks.

FMS-WM’s close cooperation with FMS-SG and supervisory bodies / regulators makes it

possible to identify potential future risks early on and avoid them before they arise. External

specialists are used as necessary in connection with legal matters.

In cooperation with the Legal & Group Compliance unit of FMS-SG, the Legal department in

FMS-WM’s Legal & Group Compliance unit controls and monitors legal risks which could arise

for FMS-WM in its dealings with third parties.

In particular, FMS-WM counteracts the risk of internal and external fraud based on an internal

control system, an Internal Audit unit and ongoing measures to safeguard employees’ risk

awareness and sense of vigilance.



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Operational risks that concern the services are monitored directly at FMS-SG. Operational risks

and losses incurred by FMS-WM, or by FMS-SG that have an effect on FMS-WM, are reported

to the Executive Board in the monthly wind-up report and to the Supervisory Board once every

quarter. The results of the ORSAs are reported to the Executive Board and Supervisory Board

either in a separate ORSA report or in the annual operational risk report, which also covers

the operational events and loss events that occurred and the risk early warning indicators.

FMS-SG publishes a quarterly report on relevant early warning indicators agreed with

FMS-WM’s Risk Controlling; this report addresses potential operational risks at FMS-WM,

FMS-SG and potential operational outsourcing risks of FMS-WM and is presented the Exec-

utive Board once a year as part of operational risk reporting.

The aforementioned reports provide the Executive Board of FMS-WM with a comprehensive

overview of operational risks, both at FMS-SG and at FMS-WM.

Monitoring outsourcing risk is the responsibility of the Sourcing & Servicer Steering team. The

performance of outsourcing partners is reported on in the monthly wind-up report, and in a

detailed service provider management report provided to the Executive Board.

Project risks are reported in regular project meetings, steering boards and / or regularly to

the Executive Board of FMS-WM depending on the scope of the project in question. These

reports also cover changes in the project risk situation as well as the status of implementa-

tion and effectiveness of mitigation measures. Significant risks arising from IT projects are

consolidated and reported to the Executive Board via quarterly IT risk management report-

ing. In the case of significant non-IT projects, regular reports that also take project risks

into account are submitted to the Executive Board. The latest IT risk situation regarding the

capability of IT service providers is also monitored and reported to the Executive Board via

quarterly IT risk management reporting.

In parallel, regular checks are performed on IT processes and workflows. In doing so, meas-

ures to mitigate IT risks are implemented and any shortcomings identified are documented

and remedied.

The relevant decision-makers are informed if significant legal risks emerge or threaten to

emerge in relation to individual transactions. Legal and regulatory changes as well as changes

in general case law are monitored by the individual units.



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Risk position

The expected losses in FMS-WM and FMS-SG estimated in the ORSA have increased slightly

compared to the previous year.

An EL of EUR 13.7 million (previous year: EUR 13.2 million) was estimated for the fiscal year.

The recording of the “Compliance Risk Analysis” risk by the Chief Information Security Officer

and the updated assessment of the IT, protection needs analysis and fraud risks led to an

increase in the EL. The unwinding of the portfolio had an offsetting effect. One material indi-

vidual risk was identified (previous year: no).

Out of the total of all identif ied operational risks, around 96.4% have an EL of less than

EUR 0.1 million, while 3.5% amount to between EUR 0.1 million and EUR 0.5 million; only one

risk has an EL of more than EUR 0.5 million.

OTHER RiSKS

Equity risk

Equity risk arises at FMS-WM especially from the investment in DEPFA BANK plc and FMS-SG.

The book value of DEPFA BANK plc’s equity instruments held by FMS-WM amounted to

EUR 323 million as at 31 December 2019 (previous year: EUR 709 million including hybrid

capital bonds). During preparation of the annual financial statements, FMS-WM regularly

conducts impairment testing of the book value of the investment using a discounted cash

flow (DCF) model, which is based on the DEPFA Group’s current business plan. Assuming

a one-year forecast horizon and a confidence level of 99.95%, the DEPFA Group estimates

in the Group-wide analysis of its risk-bearing capacity, which includes all DEPFA Group risk

positions, that its capital requirement for covering unexpected losses stood at EUR 0.05 billion

as at December 2019 (previous year: EUR 0.1 billion).

Assuming that the unexpected losses calculated in the analysis of the risk-bearing capacity

were to immediately affect cash flow and were incurred in addition to the business develop-

ments projected in the DCF valuation model, this results in an equity risk (possible reduction

in the company’s value) of EUR 0.05 billion (previous year: EUR 0.1 billion).

Risk Controlling at FMS-WM receives the monthly wind-up report of the DEPFA Group, which

is the primary tool for monitoring and managing changes in various risk types affecting the

DEPFA Group. Suspicious or implausible developments and ad-hoc queries regarding the

DEPFA Group’s risk positions can be tracked using the daily market liquidity and counterparty

risk reports as well as other reports prepared at dif ferent intervals.



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For major parts of the DEPFA Group Wind Down Report, triggers have been defined which, if

exceeded, require a report to be made to the head of Risk Controlling & Quantitative Analytics

outlining the event that occurred, including the measures already taken by the DEPFA Group.

Major operational risk events and identified material operational risks are reported on an

ad-hoc basis to Risk Controlling at FMS-WM. Risk Controlling informs the head of Risk Con-

trolling & Quantitative Analytics accordingly. In addition, according to the Framework Agree-

ment in place between FMS-WM and the DEPFA BANK plc certain material business trans-

actions require the approval of FMS-WM.

The risks arising from FMS-SG continue to be measured and managed by way of direct

documentation of the operational risk in the uniform risk management processes applicable

to both FMS-WM and FMS-SG.

Tax risk

Tax risk assessed on a qualitative basis results from potential changes in tax legislation, from

potential changes in tax jurisdiction and from interpretations in the application of tax laws by

FMS-WM that potentially dif fer from those of the tax authorities. Adequate processes are in

place at FMS-WM for the analysis and management of tax risk. It turns to external advisers

as necessary in connection with tax matters.

Regulatory risk

Regulatory risk, which is also assessed on a qualitative basis, is the risk that lawmakers or

regulatory authorities will change the existing legal framework, with the change entailing a

negative impact on FMS-WM. Among other things, a data service distributed by the Asso-

ciation of German Public Banks is used to identify regulations relevant to FMS-WM. Group

Compliance monitors the implementation of necessary measures and reports to the Execu-

tive Board at regular intervals.

ASSESSMENT OF THE OVERALL RiSK EXPOSuRE AND OuTLOOK

The largest risks to which FMS-WM is exposed still are credit risk, operational risk, especially

outsourcing risk, and the equity risk resulting from DEPFA BANK plc.

FMS-WM’s credit risks arise from the portfolio transferred from the HRE Group and from the

portfolio extensions. With the exception of a few cases related to forced extensions, restruc-

turings and rescue acquisitions subject to strict limits, under its business strategy FMS-WM

will not engage in any new business that entails additional credit risks.



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The portfolio comprises financing, with some positions having very long maturities. Further-

more, the portfolio also carries high concentration risks which are expected to intensify further

over time due to the varying speed with which the portfolio will be wound up through sched-

uled and unscheduled principal repayment or sales. Portfolio concentrations are monitored as

part of the determination of credit risk but can only be managed to a limited extent due to the

task of winding up the portfolio. This is done implicitly by incorporating them into the control

logic (including unexpected loss) and explicitly by developing wind-up strategies and making

decisions on individual assets. The greater the concentrations in the portfolio, the greater the

danger that actual losses will dif fer significantly from the average losses expected at port-

folio level. Defaults in large positions in the portfolio could therefore put significant downward

pressure on financial results. In keeping with its wind-up strategy which seeks to maximising

the assets’ value, FMS-WM intends to reduce the credit risks incrementally pursuant to the

guidance in the wind-up plan.

The sale of risk exposures in the current fiscal year focused on public-sector financing, in

particular Italian government bonds.

FMS-WM recognises risk provisions for at-risk and impaired risk positions by recognising

specific loan loss provisions for loans or writing down securities. In addition general loan

loss provisions are recognised for potential default risks in the portfolio. If necessary, country

risk provisions are recognised for country risks. Market and counterparty risks are subject to

stringent limits and extensive monitoring. Changes in the interest rate, foreign exchange and

counterparty risks to be monitored arise in particular from funding and hedging activities. In

the case of certain sales strategies, hedging instruments can be unwound at a point in time

unrelated to the sale of a position. The resulting open market risk positions are monitored,

subjected to limits and reported on separately. Regular reports are issued on the progress of

the wind-up strategies. If necessary when market conditions or the prospects of implement-

ing the individual strategy change, the positions are hedged again.

Besides the management of the portfolio, the focus in the 2019 reporting period was again on

winding up the DEPFA Group. For this purpose, DEPFA liabilities acquired by FMS-WM were

sold to DEPFA ACS at market value. Furthermore, the DEPFA Funding II and DEPFA Fund-

ing III hybrid capital bonds and the subordinated DEPFA loans held by FMS-WM were sold to

the issuer at market value in fiscal year 2019. In return, FMS-WM acquired risk positions from

DEPFA Group companies, also at market value.

Winding up the portfolio and the DEPFA Group in a way that maximises value will continue to

be the focus in fiscal year 2020.



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Report on opportunities and forecast report

MACROECONOMiC DEVELOPMENTS

Unless otherwise indicated, the following data is presented on an annualised basis.

The IMF 1 expects a 3.3% increase in global economic growth for 2020, with a recovery

anticipated in larger economies such as Brazil, India, Mexico and Russia in particular. The

positive effects of monetary policy in 2019 will continue in 2020 and will support economic

growth. The fulfilment of this forecast depends heavily on whether additional trade conflicts

between China and the USA can be avoided, whether or not the United Kingdom makes a dis-

orderly exit from the EU and whether or not geopolitical and social conflicts escalate.

According to IMF forecasts, the euro zone economy will benefit from an increase in foreign

demand in 2020. The adverse effect of factors such as new emissions standards on the auto-

motive industry will also be weaker than in 2019. Economic growth in the euro zone is only

expected to rise slightly to 1.3% (2019: 1.2%), with an increase to 1.1% forecast for Germany

(2019: 0.5%) and growth of 0.5% anticipated for Italy (2019: 0.2%). The IMF believes that

France’s economic growth will remain steady at 1.3% (2019: 1.3%).

The general election in the United Kingdom at the end of 2019 paved the way for an orderly

withdrawal from the EU. However, the details of this withdrawal from the EU have yet to be

negotiated. The IMF is forecasting economic growth of 1.4% for the United Kingdom assuming

that it makes an orderly exit from the EU.

In the USA, the IMF anticipates further economic growth for 2020 due to the improved employ-

ment situation and rising consumption and despite weaker investment forecasts. However,

this growth will be slightly lower compared to 2019 without fiscal stimulus. The IMF is fore-

casting economic growth of 2.0% (2019: 2.3%) for the USA in 2020.

Macroeconomic risks could materialise from the following factors (note that these are

not included in the assumptions underlying the statements made in the Development of

FMS Wertmanagement section):

▶ Additional protectionist measures from the US government cannot be ruled out for 2020

and could have an adverse impact on economies that are particularly relevant for FMS-WM

(euro zone countries, the United Kingdom and the USA).

▶ An escalation in the geopolitical situation in the Middle East could have considerable effects

on global trade and oil prices and thus could have an indirect impact on economies relevant

to FMS-WM.

1 Source: IMF World Economic Outlook, October 2019 (also applies to further references to the IMF in this section)



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▶ The spread of coronavirus (SARS-CoV-2 / COVID-19) could do serious and sustained dam-

age to expected macroeconomic developments around the world. This is particularly true

for economies relevant to the FMS-WM portfolio such as Italy, the United Kingdom and the

USA. The particularly severe impact of the spread of coronavirus in Italy could negatively

impact not only the country’s economic growth trend but also its debt. Already negative

expectations in this regard could lead to a sharp and lasting widening of credit spreads for

Italian public-sector borrowers.

▶ In addition to possible negative developments in economies relevant to the FMS-WM port-

folio, significant restrictions (e. g. restrictions on movement, quarantine measures, school

closures, etc.) could also arise. It is not yet possible to anticipate whether and, if so, to what

extent these restrictions and any increased illness rates at FMS-WM and FMS-SG sites

could have a negative impact on the operating stability of the business despite the mitiga-

tion measures already introduced.

▶ Escalating social unrest in individual developing countries could increase volatility in the

financial markets and thus dent investor confidence.

▶ Negative effects of climate change such as droughts, forest fires and hurricanes could

have an adverse impact not only on insurance companies but also on affected economies.

▶ Tensions remain high in the EU. If the negotiations on the specific details of the United

Kingdom’s exit from the EU were to fail to achieve an amicable solution, this could disrupt the

capital markets, which would have a strongly negative effect on the outlook for the UK econ-

omy in particular but also for the economies of the other EU member states.

▶ On the capital markets, the fundamental overhaul of reference interest rates for variable-rate

financial instruments (“benchmark reform”) could create uncertainty. This uncertainty could

arise from both different transition speeds in major currencies (EUR, USD, GBP) as well as

the currently still unclear objective of the transition.



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Commercial Real Estate

As a result of extensive existing liquidity, investors are expected to continue increasingly favour-

ing real estate in their multi-asset portfolios in 2020 due to their relatively high expected returns.

The political situation in the United Kingdom will be defined by its withdrawal from the EU in

2020. After the decline in investments in 2019, an increase in transaction volumes is once

again expected for the United Kingdom in 2020.

Although on the one hand investor interest in the US commercial real estate market is expected

to remain high in 2020, on the other hand investment volumes in this market are also predicted

to decline by up to 10% compared to 2019. This results from very high real estate prices com-

bined with more cautious and selective investors.

Infrastructure

The global project financing and infrastructure market is expected to expand in 2020 as age-

ing infrastructure in many countries needs to be replaced, adjustments to new technology are

required and new energy production channels need to be developed.

According to Moody’s, global transport infrastructure and the project financing sector are likely

to remain stable in 2020. Proceeds from toll roads are anticipated to increase by between 1.5%

and 2.5% in the USA and by between 1.0% and 3.0% in Europe in 2020.

In light of the fact that banks and investors still expect a low interest rate environment, it is

assumed that there will still be demand for infrastructure financing in Europe over the com-

ing years.

Public Sector

After the United Kingdom’s withdrawal from the EU at the start of 2020, the detailed arrange-

ments for this withdrawal will cause market price volatility. Trade disputes could flare up again

after the initial agreements. Geopolitical risks such as the Iran conflict and other risks such as

coronavirus will keep uncertainty high in a time where central banks have largely exhausted

their options. The budget situation in euro zone countries is likely to improve as long as the

economy does not deteriorate further.



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Structured Products

In 2020, spreads for European ABS could still narrow but only slightly at best, as spreads are

already very low. A new issue volume of EUR 95 billion is anticipated for 2020, which is less

than 2019.

The issue volume of pure ABS structures in the USA is expected to remain close to 2019 levels

in 2020 at around USD 220 billion to USD 240 billion. The fundamental market environment

in the USA is also predicted to be stable.

However, the assumptions for the unwinding of the portfolio (economic repayment profile)

are derived from the market data available at an individual asset level on the planning date.

DEVELOPMENT OF FMS WERTMANAGEMENT

Portfolio

The portfolio is expected to be unwound further by an estimated EUR 4 billion to EUR 6 billion

nominally in fiscal year 2020, especially in the Public Sector and Structured Products seg-

ments. The forecast is based on the contractual terms of the portfolio, factoring in assumptions

about the economic repayment profile for structured products and assumptions by FMS-WM

portfolio managers about sales, required compulsory extensions and restructuring measures.

The anticipated portfolio wind-up hinges on the prevailing market environment. Compulsory

extensions for maturing loans can be avoided if follow-up financing is obtained from other

lenders or if borrowers repay their loans. Alongside the execution of planned measures,

FMS-WM’s wind-up strategy is also based on the exploitation of opportunities as these arise,

identified by continual monitoring of the portfolio and market conditions.

There were no developments in the 2020 fiscal year that contradicted this forecast.

Results of operations

To the extent that the developments in the core markets materialise as described above and

no unforeseen events trigger other critical developments affecting the portfolio of FMS-WM,

the company is again expected to at least break even in the years to come. The result from

ordinary activities is mainly dependent on risk provisions and net income from investment –

volatile items which are heavily influenced by valuations. Due to the high concentration risks

in individual counterparties and in some individual markets, valuation parameters may lead

to corresponding positive and negative deviations in these items, resulting in deviations from

the forecasted result.



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FMS-WM anticipates current contributions from net interest and commission income to decline

in the 2020 fiscal year due to the progression of the portfolio wind-up and the further decrease

in one-off effects.

Administrative expenses should show a slightly declining trend in connection with the progres-

sive wind-up of the portfolio. However, according to current planning, FMS-WM assumes that

current income will decline more quickly than administrative expenses.

Based on the above assumptions, FMS-WM’s 2020 forecast predicts to at least break even in

terms of its result from ordinary activities, because it expects the positive balance from current

income less administrative expenses to be at least equal to a possible negative balance of

the Risk provisions and Net income from investments items influenced by valuations and the

proceeds of sales.

There were no developments in the 2020 fiscal year that contradicted these forecasts.

Given the aforementioned indicators, any earnings forecast for the coming fiscal years is

fraught with uncertainty and thus not particularly reliable.

Funding

FMS-WM assumes that it will be able to raise funds as planned for 2020. FMS-WM is aiming

for capital market issues in the amount of EUR 2 billion to EUR 5 billion in 2020. The intention

is also to obtain longer-term funding in euros of EUR 5.6 billion from the FMS. FMS-WM plans

to draw on the entire EUR 30 billion funding facility for raising funds and keep the proportion

of long-term funding in the overall funding volume at around 50% over the next few years.

FMS-WM will continue to raise long-term foreign currency funding, in particular in pound

sterling and US dollars, and short-term money market funding itself.

Opportunities for future development

In addition to the opportunities arising from a positive trajectory in the markets relevant to

FMS-WM and the resulting chances for accelerated portfolio wind-up at maximum profit,

opportunities for FMS-WM may also be created by strategic projects and legislative changes.

The opportunities listed below also involve risks that could arise when implementing these

projects.

The German act reorganising the tasks of the Federal Agency for Financial Market Stabilisa-

tion (FMSA-Reorganisation Act – FMSANeuOG) has made it possible for the FMS to provide

FMS-WM with the funds required for longer-term EUR funding, starting in fiscal year 2019.

This gives FMS-WM access to a source of funding from the Federal Republic of Germany that

is even more cost-effective than FMS-WM’s own issues.



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79

The overhaul of the reference interest rates for variable-rate financial instruments (“benchmark

reform”) represents a significant challenge for FMS-WM. In light of this, FMS-WM launched the

Post-IBOR project in January 2019 to systematically analyse and process the economic and

legal challenges posed by the benchmark reform and manage potential opportunities and risks.

With regard to the UK’s withdrawal from the EU, FMS-WM is carrying out a cross-functional

analysis of potential effects and monitoring possible withdrawal scenarios. Specifically, this

involves reviewing legal risks, particularly those relating to the existing derivatives portfo-

lio with counterparties (banks), and introducing necessary measures. This includes, among

other things, the switch to contractual partners that maintain a branch in an EU member state.

FMS-WM has developed medium-term objectives aimed at ensuring operational stability and

a sustainable cost structure in the future that takes into account all risks within the portfolio.

Reducing complexities within the portfolio should significantly reduce the expenses for risks

and portfolio management and give FMS-WM more room for manoeuvre in the management of

the portfolio. Efforts to implement measures relating to both the managed portfolio and internal

processes and procedures had already begun in fiscal year 2019. There were no develop-

ments in the 2020 fiscal year that preventing the continuation of these measures. Restrictions

in implementing the project may mean that FMS-WM does not meet its objectives either in

whole or in part and, subsequently, cannot fully or partly realise its stated goals for the project.



80

iNTERNAL CONTROL / RiSK MANAGE-MENT SySTEM RELEVANT TO THE FiNANCiAL

REPORTiNG PROCESS

The internal control and risk management system relevant to the financial reporting process

(ICS / RMS) and focused on business-critical processes of FMS-WM serves to ensure com-

pliance particularly with financial reporting standards and requirements and the reliability of

the accounting.

Responsibility for the ICS rests with the central ICS entity in the IT, Sourcing & Operations unit,

which is part of the CEO division.

Accounting (Finance & Tax department) is assigned to the CEO division and managed by the

Head of Finance, Controlling & Portfolio Steering.

FMS-WM has outsourced material aspects of its accounting, with its subsidiary FMS-SG

essentially handling portfolio management, general ledger and subledger accounting includ-

ing financial accounting, master data management, payment transaction handling, and regu-

latory reports and annual financial statement preparation.

In addition to services directly related to accounting, IT services were also outsourced; these

are also relevant to the ICS.

IT services are monitored by the IT Steering & Project Planning department in the IT, Sourc-

ing & Operations unit.

The IT service providers are also subject to the ICS at FMS-WM pursuant to contractual

provisions.

FMS-WM’s departments manage and supervise these services by applying the criteria defined

in service level agreements. FMS-WM’s employees in the Finance & Tax department manage

outsourced activities related more specifically to accounting.

In addition to its responsibilities for monitoring and managing outsourced services, FMS-WM

is also the ultimate authority for the following methods and decisions related to the financial

reporting process:

▶ Making decisions on recognition, measurement and disclosure options,

▶ Preparing certain booking instructions, e. g. for valuations, provisions and the recognition

of taxes.

An interdepartmental NPP managed by Sourcing & Servicer Steering, which is part of the CEO

division, ensures the correct mapping of products and product enhancement not yet existing.

F i N A N C i A L R E P O R T / M A N A G E M E N T R E P O R T i N T E R N A L C O N T R O L / R i S K M A N A G E M E N T S y S T E M R E L E VA N T T O T H E F i N A N C i A L R E P O R T i N G P R O C E S S


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81

The basic task of FMS-WM’s ICS is to fulfil the following material principles:

▶ Safeguarding the effectiveness and efficiency of operations,

▶ Propriety and reliability of internal and external accounting,

▶ Compliance with legal requirements with relevance for the entity.

Based on the target levels of customary market standards (COSO framework), the principal

objectives for the ICS at FMS-WM were specified as follows:

▶ Increase transparency and reliability of management-related information for effective and

efficient management,

▶ Protect the business assets by reducing the potential for fraud,

▶ Increase process reliability and / or reduce the likelihood of errors in the processes,

▶ Create the possibility to be able to point out opportunities and undesirable developments

more quickly,

▶ Ensure compliance with internal and external regulations.

The planning and design of operational control procedures for the ICS takes into account

FMS-WM’s internal business policy objectives and principles. To this end, individual control

objectives that are derived from the overall objectives are defined for the planned control pro-

cedures. These accounting-related control objectives affect the statements and disclosures

in the annual financial statements as to completeness, recognition, accuracy, measurement,

rights and obligations, presentation and compliance with the accrual basis of accounting.

The ICS framework at FMS-WM governs the specifics of the principles of the ICS for FMS-WM

and its service providers.

Overall responsibility for the FMS-WM internal control system lies with the FMS-WM Execu-

tive Board.

The central ICS entity makes sure that the ICS framework is firmly integrated in the units of

FMS-WM and its service providers. It handles the centralised management of the ICS data-

base, the coordination of the annual standard ICS procedure, and the consolidation of the ICS

control confirmation into a high-level ICS report. To ensure the effectiveness of the FMS-WM

ICS, the ICS framework is regularly reviewed for compliance with legal provisions and industry

standards, and updated as appropriate.

The relevant unit heads are responsible for identifying the controls required, implementing an

appropriate control system in conjunction with the risks relevant to bookkeeping and account-

ing and business-critical risks, and monitoring performance of the controls. The identified

control owner is responsible for defining and performing the relevant ICS controls.



82

Process-independent audits are also utilised by Internal Auditing to assess the effectiveness

and suitability of the FMS-WM ICS.

As part of the annual ICS control process carried out by the central ICS entity, the existing

controls are validated in the context of Group-wide service performance processes. This

validation is based on interviews with the relevant unit heads and control owners, and takes

into account the results of the annual ORSA conducted by the Risk Controlling department

as well as the findings of internal and external audits.

For fiscal year 2019, the establishment of the ICS and proper performance of the controls

were confirmed in an ICS Control Attestation by the relevant unit heads at FMS-WM and the

department heads and managing directors of FMS-SG.

The control system applicable to outsourced parts of IT services was approved by a report

prepared pursuant to ISAE 3402. Furthermore, FMS-WM has performed additional IT controls

relating to the IT services as needed.



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83

annual f inancial statements

BALANCE SHEET FOR THE FiSCAL yEAR ENDED 31 DECEMBER 2019

of FMS Wertmanagement

Assetsin EUR

thousandin EUR

thousand

31.12.2019in EUR

thousand

31.12.2018in EUR

thousand

1. Cash reserve

Balances with central banks 6,096,607 4,868,986

Of which: with Deutsche Bundesbank EuR 6,096,607 thousand (previous year: EuR 4,868,986 thousand)

6,096,607 4,868,986

2. Loans and advances to banks

a) Payable on demand 32,708,987 29,886,255

b) Other loans and advances 1,962,270 6,141,739

34,671,257 36,027,994

3. Loans and advances to customers 15,730,822 13,299,903

Of which: secured by mortgages EuR 398,628 thousand (previous year: EuR 473,690 thousand) Public-sector loans EuR 5,104,785 thousand (previous year: EuR 5,122,579 thousand)

4. Debt instruments

a) Bonds and notes

aa) Public-sector issuers 30,783,041 30,599,861

Of which: eligible as collateral for Deutsche Bundesbank advances EuR 20,065,182 thousand (previous year: EuR 20,481,026 thousand)

ab) Other issuers 34,635,633 34,790,143

Of which: eligible as collateral for Deutsche Bundesbank advances EuR 3,776,213 thousand (previous year: EuR 4,550,136 thousand)

65,418,674 65,390,004

b) Own debt instruments 14,851,752 16,688,222

Principal amount EuR 14,848,128 thousand (previous year: EuR 16,685,434 thousand)

80,270,426 82,078,226

5. Shares and other non-fixed-income securities 0 385,676

6. Other long-term equity investments 3 3

Of which: in banks EuR 0 thousand (previous year: EuR 0 thousand) in financial services institutions EuR 0 thousand (previous year: EuR 0 thousand)

7. Shares in affiliated companies 474,346 493,169

Of which: in banks EuR 323,274 thousand (previous year: EuR 323,274 thousand) in financial services institutions EuR 30,000 thousand (previous year: EuR 50,000 thousand)

8. Intangible fixed assets 333 775

Purchased concessions, industrial and similar rights and assets, and licences in such rights and assets

9. Tangible fixed assets 170 274

10. Other assets 477,746 889,789

11. Prepaid expenses 8,768,027 6,665,427

Total assets 146,489,737 144,710,222

f inancial report

F i N A N C i A L R E P O R T / A N N u A L F i N A N C i A L S TAT E M E N T S B A L A N C E S H E E T F O R T H E F i S C A L y E A R E N D E D 31 D E C E M B E R 2 0 19


84

Equity and liabilitiesin EUR

thousand

31.12.2019in EUR

thousand

31.12.2018in EUR

thousand

1. Liabilities to banks

a) Payable on demand 948,279 618,130

b) With agreed maturity or notice period 2,596,817 9,410,075

3,545,096 10,028,205

2. Liabilities to customers

Other liabilities


b) With agreed maturity or notice period 40,893,040 13,578,774

40,978,959 13,727,113

3. Securitised liabilities

a) Debt instruments issued 55,890,254 72,889,352

b) Other securitised liabilities 25,043,047 29,295,767

of which: Commercial paper: EuR 25,043,047 thousand (previous year: EuR 29,295,767 thousand)

80,933,301 102,185,119

4. Other liabilities 651,549 402,684

5. Deferred income 18,288,231 16,387,134

6. Provisions

a) Provision for taxes 18,869 27,808

b) Other provisions 322,394 436,940

341,263 464,748

7. Equity

a) Subscribed capital 200 200

b) Capital reserves 1,800 1,800

c) Retained earnings

Other retained earnings 1,513,219 1,398,420

d) Net retained profits 236,119 114,799

1,751,338 1,515,219

Total equity and liabilities 146,489,737 144,710,222

1. Contingent liabilities

Contingent liabilities from guarantees and indemnity agreements 657,551 768,101

2. Other obligations

irrevocable loan commitments 1,916,049 3,525,523

F i N A N C i A L R E P O R T / A N N u A L F i N A N C i A L S TAT E M E N T S B A L A N C E S H E E T F O R T H E F i S C A L y E A R E N D E D 31 D E C E M B E R 2 0 19


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85

iNCOME STATEMENT


Income statementin EUR

thousandin EUR

thousand

01.01. –31.12.2019

in EUR thousand

01.01. –31.12.2018

in EUR thousand

1. Interest income from

a) Lending and money market transactions 4,769,837 4,514,923

Of which: negative interest deducted: EuR 247,021 thousand (previous year: EuR 658,111 thousand)

b) Fixed-income securities and registered government debt 1,973,806 2,006,964

6,743,643 6,521,887

2. Interest expenses

Of which: positive interest deducted EuR 305,098 thousand (previous year: EuR 635,441 thousand) –6,418,586 –6,174,103

325,057 347,784

3. Current income from

a) Other long-term equity investments 5 0

b) Shares in affiliated companies 49,136 0

49,141 0

4. Income from profit pooling, profit transfer or partial profit transfer agreements 1,417 2,460

5. Commission income 13,045 16,088

6. Commission expenses –17,844 –11,783

–4,799 4,305

7. Other operating income 8,996 14,754

8. General and administrative expenses

a) Personnel expenses

aa) Wages and salaries –17,476 –17,264

ab) Social security, post-employment and other employee benefit costs –1,660 –1,698

Of which: in respect of post-employment benefits EuR 138 thousand (previous year: EuR 150 thousand) –19,136 –18,962

b) Other administrative expenses –118,382 –124,932

–137,518 –143,894

9. Depreciation, amortisation and write-downs of intangible and tangible fixed assets –547 –574

10. Other operating expenses –11,019 –5,500

11. Write-downs of and valuation allowances on receivables and certain securities, and additions to loan loss provisions –282,789 0

12. Income from reversals of write-downs of receivables and certain securities and from the reversal of loan loss provisions 0 310,205

–282,789 310,205

13. Write-downs of and valuation allowances on shares in affiliated companies, other long-term equity investments and securities classified as fixed assets 0 –415,422

14. Income from reversals of write-downs of shares in affiliated companies, other long-term equity investments and securities classified as fixed assets 305,621 0

305,621 –415,422

15. Result from ordinary activities 253,560 114,118

16. Taxes on income –17,311 682

17. Other taxes not included in “10. Other operating expenses" –130 –1

18. Net income for the year 236,119 114,799

19. Net retained profits 236,119 114,799

F i N A N C i A L R E P O R T / A N N u A L F i N A N C i A L S TAT E M E N T S i N C O M E S TAT E M E N T


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CASH FLOW STATEMENT


Cash flow statement

01.01. –31.12.2019

in EUR thousand

01.01. –31.12.2018

in EUR thousand

1. Net income / loss for the period 236,119 114,799

Non-cash items included in net income / loss for the period and reconciliation to cash flow from operating activities

2. + / – Depreciation, amortisation and write-downs and valuation allowances on receivables and items of fixed assets / reversals of such write-downs and valuation allowances 301,877 182,087

3. + / – increase / decrease in provisions –114,546 –66,974

4. + / – Other non-cash expenses / income –105,006 832,975

5. – / + Gain / loss on disposal of fixed assets –232,998 –2

6. – / + Other adjustments (net) –50,559 –2,460

7. – / + increase / decrease in loans and advances to banks 1,469,588 5,710,164

8. – / + increase / decrease in loans and advances to customers –2,159,297 –137,071

9. – / + increase / decrease in securities 902,213 7,094,121

10. – / + increase / decrease in other assets relating to operating activities –2,620,644 534,481

11. + / – increase / decrease in liabilities to banks –6,603,231 –5,954,166

12. + / – increase / decrease in liabilities to customers 27,143,108 398,532

13. + / – increase / decrease in securitised liabilities –21,042,800 –5,777,974

14. + / – increase / decrease in other liabilities relating to operating activities 3,350,290 –1,987,288

15. + / – interest expense / interest income –325,057 –347,784

16. + / – income tax expense / income 17,311 –682

17. + interest and dividend payments received 5,260,590 6,521,887

18. – interest paid –4,971,304 –6,174,103

19. – / + income taxes paid 78,967 –51,406

20. = Cash flows from operating activities 534,621 889,136

21. + Proceeds from disposal of long-term financial assets 638,671 311,085

22. + Proceeds from disposal of tangible fixed assets 3 2

23. – Payments to acquire tangible fixed assets –1 –18

24. – Payments to acquire intangible fixed assets 0 0

25. = Cash flows from investing activities 638,673 311,069

26. = Cash flows from financing activities 0 0

27. Net change in cash funds 1,173,294 1,200,205

28. + / – Effect on cash funds due to exchange rate movements and remeasurements 3,583 –437

29. + Cash funds at beginning of period 5,042,693 3,842,925

30. = Cash funds at end of period 6,219,570 5,042,693

The cash flow statement was prepared using the indirect method in accordance with DRS 21. The cash funds

reported comprise demand deposits with banks that are payable on demand and do not serve as collateral for

financial derivatives, as well as balances with Deutsche Bundesbank.

F i N A N C i A L R E P O R T / A N N u A L F i N A N C i A L S TAT E M E N T S C A S H F L O W S TAT E M E N T


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STATEMENT OF CHANGES iN EQuiTy

Statement of changes in equity for the period from 1 January until 31 December 2019

Balanceat 01.01.2019

in EUR thousand

Appropriation of net

income / loss in EUR

thousand

Net incomefor the year

in EUR thousand


in EUR thousand

Subscribed capital 200 0 0 200

Capital reserves 1,800 0 0 1,800

Other retained earnings 1,398,420 114,799 0 1,513,219

Net retained profits 114,799 –114,799 236,119 236,119

Equity as defined by German commercial law 1,515,219 0 236,119 1,751,338

Net retained profits from the 2018 fiscal year were transferred to retained earnings by decision of the Supervi-

sory Board of FMS Wertmanagement AöR dated 29 March 2019.

Statement of changes in equity for the period from 1 January until 31 December 2018


in EUR thousand

Appropriation of net

income / loss in EUR

thousand

Net incomefor the year

in EUR thousand


in EUR thousand

Subscribed capital 200 0 0 200

Capital reserves 1,800 0 0 1,800

Other retained earnings 1,039,281 359,139 0 1,398,420

Net retained profits 359,139 –359,139 114,799 114,799

Equity as defined by German commercial law 1,400,420 0 114,799 1,515,219

F i N A N C i A L R E P O R T / A N N u A L F i N A N C i A L S TAT E M E N T S S TAT E M E N T O F C H A N G E S i N E Q u i T y


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NOTES

GENERAL iNFORMATiON

Legal framework

FMS Wertmanagement AöR, Munich (FMS-WM), was founded on 8 July 2010 and recorded

in the Commercial Register of the Munich Local Court under number HRA 96076 on

13 September 2010. FMS-WM is domiciled in Munich.

Under agreements dated 29 and 30 September 2010, a portfolio with a nominal value of

EUR 175.7 billion, excluding derivatives, was transferred to FMS-WM effective 1 October 2010.

FMS-WM is an organisationally and financially independent winding-up institution under public

law with partial legal capacity that may engage in legal transactions in its own name, sue and

be sued in court. It is regulated and supervised by the Federal Agency for Financial Market

Stabilisation, Frankfurt am Main (FMSA), and the Federal Financial Supervisory Authority, Bonn

and Frankfurt am Main (BaFin).

In 2012, FMS-WM established its own service entity, FMS Wertmanagement Service GmbH,

Unterschleißheim (FMS-SG), which assumed responsibility for portfolio servicing and the pro-

vision of all material services associated with it effective 1 October 2013. FMS-WM retains final

decision-making powers and ultimate responsibility for the risk assets under management.

The master agreement governing the outsourcing of business processes and services also

grants FMS-WM extensive rights to obtain information and perform inspections, enabling the

latter to monitor and control the servicing of the risk assets by FMS-SG. FMS-SG operated

from three sites in fiscal year 2019 (Unterschleißheim, Dublin and New York).

In addition, IBM Deutschland GmbH, Ehningen (IBM Deutschland) and DATAGROUP Finan-

cial IT Services GmbH, Düsseldorf (DG FIS), were engaged to provide essential IT services.

DEPFA BANK plc

Effective 19 December 2014, FMS-WM acquired all shares in DEPFA BANK plc, Dublin

(DEPFA BANK plc). With this action, FMS-WM implemented the decision of 13 May 2014 by

the inter-ministerial steering committee, which, after considering all options, decided to wind

up DEPFA BANK plc and its subsidiaries via FMS-WM.

F i N A N C i A L R E P O R T / A N N u A L F i N A N C i A L S TAT E M E N T S N O T E S


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89

Accounting principles

These annual f inancial statements of FMS-WM were prepared in accordance with Sec-

tion 8a (1) sentence 10 in conjunction with Section 3a (4) of the German Law Establishing a

Financial Market Stabilisation Fund (Gesetz zur Errichtung eines Finanzmarktstabilisierungs-

fonds – FMStFG) and the supplementary provisions of its Charter pursuant to the provisions

of the Handelsgesetzbuch – HGB for large corporations, the supplementary provisions of

the HGB for credit institutions and financial services institutions as well as the requirements

of the Verordnung über die Rechnungslegung der Kreditinstitute und Finanzdienstleistungs-

institute – RechKredV.

Since FMS-WM is a capital market oriented organisation as defined by Section 264d HGB, it

has expanded its annual financial statements to include a statement of changes in equity and

a cash flow statement in accordance with Section 264 (1) Sentence 2 HGB. A management

report has also been prepared.

Accounting policies

Assets, liabilities as well as prepaid expenses and deferred income are recognised in accord-

ance with Section 246 ff. HGB. Assets, liabilities and executory contracts are measured based

on the principles of Section 252 ff. HGB in conjunction with Section 340 ff. HGB. Pursuant to

Section 2 (1) RechKredV, FMS-WM used Form 1 to structure the balance sheet and Form 3

(vertical presentation format) for the income statement.

FMS-WM took over assets, provisions, liabilities, prepaid expenses and deferred income as well

as derivatives effective as at 1 October 2010 for accounting purposes. The transfer of assets

is recognised in line with general principles; with respect of the assets taken over as part of

the spin-off for absorption (Section 123 (2) No. 1 UmwG) recognition is based on Section 24

UmwG. FMS-WM made use of the option in Section 24 UmwG, which provides for a continu-

ation of the transferring entity’s book values.

Those book values were used if the assets were transferred to FMS-WM under so-called “con-

centration agreements”. If the transferor prepares its accounting pursuant to the International

Financial Reporting Standards (IFRSs), the IFRS book value corresponds to FMS-WM’s acqui-

sition cost. The IFRS book value contains hedge adjustments for loans, advances and secu-

rities that were reported in micro valuation units; the hedge adjustments related to securities

are reported under the item, Debt instruments, and those for loans under prepaid expenses

and deferred income. The hedge adjustments for loans or securities are generally contrasted

by the market value of the hedging derivatives transferred. The payments that FMS-WM has

received or made for the hedging derivatives are shown under prepaid expenses and deferred

income. The hedge adjustments and the recognised items for accrued payments related to

derivatives are amortised regularly over the remaining terms to maturity of the correspond-

ing transactions. Expenses and income from such amortisation are reported under inter-

est expense or interest income. Both amortisation and current premium payments related to

credit default swap (CDS) exposures are reported under the items, Commission expenses or

Commission income.



90

The fact that the transferring entity’s book value represents the transfer price was to be taken

into account as part of the acquisition process. Consequently, the write-downs recognised

by the transferring entity were to be taken into account in the determination of the transfer

price. The transfer price in turn represented FMS-WM’s acquisition costs.

Loans and advances to banks and loans and advances to customers are generally carried

at their nominal value less risk provision as specific and general loan loss provisions. Differ-

ences between the nominal value and the cost, which are similar in nature to interest, are

accounted for in prepaid expenses and deferred income and recognised in profit or loss under

net interest income on a pro-rata basis over the term of the receivable. The proportionate

interest calculated at the reporting date is recognised together with the underlying receivable.

On the basis of proposals by FMS-SG, analyses by expert third parties and analyses by

FMS-WM itself, specific loan loss provisions and other provisions are recognised for individual

risks that have arisen in the lending business; these provisions take into account both the

specific counterparty default risk and, if short-term unwinding measures are sufficiently specific,

the conditions on the sales market as well. Expected future proceeds from the realisation of

collateral were discounted over the realisation period as necessary using a market interest

rate with matching maturities.

Latent risks in the lending and securities business are covered by general loan loss provisions

set up in line with the requirements of the IDW statement BFA 1/1990 on the recognition of

general loan loss provisions. They are calculated based on the loss expected within one year

as determined by FMS-SG, which is modelled for the case in question using several parame-

ters: probability of default, amount of exposure in the event of a default and expected recovery

rate in the event of a default.

Collective country valuation allowances are also recognised for loans to borrowers in countries

with discernible country risks. They are recognised in accordance with the methods required

under German tax law. The countries to be included and the amount of the valuation allow-

ances are determined on the basis of external country ratings that reflect current and expected

economic data as well as the overall political situation in the countries in question.

The Debt instruments balance sheet item, excluding own issues bought back, is allocated to

fixed assets (financial assets) because they are continuously used for operations. Debt instru-

ments are measured at amortised cost in accordance with Section 253 (1) and (3) HGB. If

FMS-WM believes that the assets are permanently impaired, impairment losses are charged

in accordance with Section 340e (1) Sentence 1 in conjunction with Sentence 2 HGB. The

existence of permanent impairment is determined in the case in question on the basis of infor-

mation supplied by FMS-SG, commissioned expert third parties and through FMS-WM own

investigations. The test of whether there is permanent impairment is generally conducted

similar to the test for impairment of loan receivables, except that market values representing

an additional trigger in the test for impairment of wind-up clusters with a high percentage of

securities traded on liquid markets are to be taken into account.



90


91

In case of a sufficiently concrete intention not to hold specific securities to maturity, these secu-

rities will no longer be recognised as continuously used for operations. They will be measured

in line with the strict lower-of-cost-or-market principle. If a full reversal of valuation measures

is not expected for these securities by the end of their holding period, a write-down to the

lower fair value will be recognised.

Investment securities that are not permanently impaired are included in the measurement base

for calculating the general loan loss provision.

When the reasons for permanent impairment no longer apply, write-ups are charged in accord-

ance with Section 253 (5) Sentence 1 HGB up to a maximum of the amortised cost.

Own debt instruments bought back are allocated to current assets (liquidity reserve). They

are measured in accordance with the strict lower-of-cost-or-market principle in accordance

with Section 253 (4) HGB.

The fair values of securities and derivatives are determined either based on external rate

sources (e. g. via stock exchanges or other providers such as Reuters) or based on mar-

ket value derived from internal measurement models (mark to model). Fair values of securi-

ties are largely determined on the basis of securities prices obtained from external sources.

Derivatives are largely measured using specific measurement models, whereby the counter-

party risk in the case of unsecured OTC derivatives is taken into account when determining

any provisions for expected losses for hedge inefficiencies or for stand-alone derivatives.

In the case of provisions for hedge inefficiencies and stand-alone derivatives, the estima-

tion techniques used to determine any excess obligation (standard measurement models

such as the discounted cash flow method) factor in market data relevant to the measurement

(in particular yield curves and exchange rates) as at the reporting date, the counterparties’

potential probability of default and any collateral.

In the measurement of secured derivatives, future cash flows are discounted on the basis of

OIS swap curves.

Securities holdings are measured based on the following measurement hierarchy, which is

oriented above all on the availability of plausible external market data:

▶ If an (indicative) market price (rate) is available for a liquid market, it is used.

▶ If a market price is not available or the market is not sufficiently liquid, the measurement is

converted to a proxy measurement based on the available market prices for similar securities.

▶ If an appropriate proxy security cannot be identified, the measurement is carried out using

the benchmark spreads or estimated spreads determined by FMS-SG’s experts.

▶ Securities not measured based on market prices, proxies, or spreads (e. g. structured

inflation-linked bonds) are measured based on financial mathematical models.



92

The parameters for internal valuation models (e. g. interest rate curves, volatilities, spreads) are

mostly derived from external sources and reviewed by Risk Controlling as to their plausibility

and accuracy. The models used for measuring structured derivatives are initially calibrated on

the basis of market data, with the subsequent valuation being based on the resulting model

parameters.

Differences that stem from the reporting of securities classified as fixed assets above their

fair value based on application of the moderate lower-of-cost-or-market principle are shown

separately in the notes.

FMS-WM holds positions in asset-backed securities (ABS). These structured financial instru-

ments are not required to be separated; they are carried as a uniform asset in each case and

in compliance with IDW RS HFA 22.

Securities repurchase agreements are reported in accordance with the provisions of Sec-

tion 340b HGB. The securities sold under genuine repurchase agreements are still reported

in the balance sheet of FMS-WM. Depending on the transferee, the obligation to repurchase

securities sold under repo agreements is presented under the balance sheet items, Liabilities

to banks, or Liabilities to customers. If securities repurchase agreements were entered into

(as buyer) to place excess liquidity on the money market, the resulting receivables are recog-

nised under the balance sheet items, Loans and advances to banks or Loans and advances to

customers, depending on the transferor. The specific securities are not presented in FMS-WM’s

balance sheet due to the lack of beneficial ownership.

Shares in affiliated companies and other long-term equity investments are recognised at cost.

If impairment is expected to be permanent, write-downs to the lower fair value are recognised.

Tangible fixed assets are recognised at cost less depreciation. The useful life is determined

based on the expected wear and tear of the tangible fixed assets.

Intangible assets are recognised at cost less amortisation. The useful life is determined based

on factors expected to limit the longevity of the intangible assets.

For the sake of simplicity and in compliance with the tax regulations, since 1 January 2019

assets costing EUR 800.00 or less before VAT have been written down in full in the year of

acquisition. Accordingly, the methodology for the establishment of an omnibus account (net

EUR 250.00 to EUR 1,000.00) which has been written down over five years on a straight-line

basis has been changed over to the above-mentioned immediate write-off method, up to a

net amount of EUR 800.00. The basis for this change is the increase in the value threshold

for immediate write-offs for tax purposes from fiscal year 2018 onwards, from a net amount

of EUR 410.00 to a net amount of EUR 800.00.

Deferred tax assets and deferred tax liabilities are initially calculated as at 31 December 2019

on temporary differences between the book values of the assets or liabilities and their tax base

and measured based on a combined income tax rate of 29.49%. The combined income tax rate

comprises corporate income tax, trade tax and the solidarity surcharge. In a general overview,



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FMS-WM’s deferred tax assets exceed its deferred tax liabilities. The surplus of deferred tax

assets at 31 December 2019 mainly stems from temporary dif ferences with respect to the

balance sheet items, Loans and advances to banks, Loans and advances to customers, Debt

instruments, as well as Provisions for expected losses. Tax loss carryforwards also exist. As

in the previous year, FMS-WM does not make use of the option to recognise the surplus of

deferred tax assets in the balance sheet in accordance with Section 274 (1) Sentence 2 HGB.

Based on the existing control and profit-and-loss transfer agreement dated 16 October 2012,

there is a consolidated VAT, corporate income tax and trade tax group with FMS-SG. Conse-

quently, the German tax obligations of FMS-SG are considered in FMS-WM’s annual financial

statements.

Prepaid expenses include:

▶ Expenditures prior to the reporting date where these concern expenses in a certain period

of time after the reporting date

▶ Deferrals (discounts) in connection with the funding business

▶ Deferrals in connection with derivative products. This primarily concerns payments made

by FMS-WM for entering into derivatives (positive market values)

▶ Accruals of positive differences between nominal value of receivables and acquisition costs,

which are similar in nature to interest

Prepaid expenses are amortised on a pro rata basis. To the extent that prepaid expenses were

recognised for payments made in connection with the takeover of derivatives and there are seri-

ous doubts regarding the derivatives’ validity or the recoverability of the payments from these

derivatives, these components of prepaid expenses are derecognised through profit or loss.

Liabilities are carried at their settlement amount. Differences between the issue amount and

the settlement amount of the liabilities are posted to deferred income or prepaid expenses

and reversed through profit and loss on a pro rata basis.

Provisions for uncertain liabilities and provisions for expected losses from executory contracts

are recognised at the settlement amount dictated by prudent business judgement. Provisions

with a remaining maturity of more than one year are generally discounted in accordance with

Section 253 (2) HGB using the average market interest rate of the past seven fiscal years

corresponding to their remaining maturity. The applicable interest rates are published by

the Deutsche Bundesbank. Provisions for expected losses from executory contracts (deriv-

atives) were recognised in the amount of the existing excess of expected obligations over

expected benefits. Financial mathematical valuation models are applied to determine the excess

obligation especially with regard to derivatives that have a complex structure.

Regardless of future developments, if a fixed excess obligation exists in the relevant market

risk factors for a derivative, this is not recognised as a provision for expected losses but

instead in other liabilities.



94

Deferred income includes:

▶ Proceeds received prior to the reporting date where these concern income in a certain

period of time after the reporting date

▶ Deferrals (premiums) in connection with the funding business

▶ Deferrals in connection with derivative products. This primarily concerns payments received

by FMS-WM for entering into derivatives (negative market values)

▶ Deferrals in connection with the lending business (discounts on receivables)

Deferred income is generally amortised on a pro rata basis.

Derivative financial instruments are entered into to hedge interest rate risk in individual

hedged items, to manage general interest rate risk and to hedge inflation, counterparty and

currency risks.

▶ Derivative financial instruments serving to hedge the market risks (basically interest rate

risks) of individual hedged items are aggregated into micro valuation units along with the

hedged items in accordance with Section 254 HGB.

▶ Derivative financial instruments that are used to manage the general interest rate risk are

aggregated into an offsetting item with the other transactions in the banking book (securi-

ties and loans) that are interest-based and regarded as non interest-induced as well as the

financial instruments issued for funding purposes. Prevailing opinion holds that this is not

a valuation unit under Section 254 HGB but an accounting practice.

▶ Derivatives such as CDS are used to hedge counterparty risks. These derivatives are not

aggregated with other hedged items in valuation units and are measured in accordance with

the general principles of commercial law (in accordance with IDW RS BFA 1).

▶ Derivative financial instruments such as currency and cross currency interest rate swaps

are used in connection with the management of foreign currency positions to close open

risk positions.

Consistent with the specifications of risk management, documented hedging relationships are

entered into at the transaction level (micro valuation units) to hedge market risks. The term of the

hedged item is used as the time horizon. Hedged items may include acquired or issued secu-

rities, loan receivables or loan liabilities, and derivatives. FMS-WM recognises these hedging

relationships using the net hedge presentation method (“Einfrierungs methode”) in accordance

with Section 254 HGB. Where the offsetting changes in value resulting from the hedged risk

(especially interest rate risk) are compensated, the changes in value in the hedged item or in

the hedge are not recognised. In an existing excess obligation, the ineffective portion of the

hedge’s hedged risk is recognised as an expense in accordance with the imparity principle

pursuant to IDW RS HFA 35 through the recognition of a provision for expected losses. The



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95

ineffective portion is computed by comparing the change in value from the hedged risk of

the hedged item with the change in value from the hedged risk of the hedging instrument.

Excess obligations for unhedged risks are treated in accordance with general accounting pol-

icies, taking into account the item-by-item measurement principle. Expenses from additions

to provisions for expected losses are shown in the net revaluation gain / loss for the lending

and securities business.

All hedging relationships are tested for effectiveness. The prospective effectiveness of the

hedges is examined primarily on the basis of linear regression or using the critical terms

match method.

In addition, FMS-WM holds credit derivatives (e. g. CDS) where it is the guarantor or the

secured party. These credit derivatives are accounted for in accordance with IDW RS BFA 1.

In addition to the necessary and recognised provisions for expected losses for valuation units,

the entire interest rate portfolio and / or banking book is evaluated for the existence of an excess

obligation. All interest-based financial instruments (“Refinanzierungsverbund”) are included

in this evaluation, including those that are designated as valuation units under Section 254

HGB. Additional provisions for expected losses for the excess obligation are only recognised

in accordance with IDW RS BFA 3 if an excess obligation existed in this offsetting item. The

loss compensation obligation of the Financial Market Stabilisation Fund (FMS) under Section 7

of FMS-WM’s Charter is included in the offsetting item.

Compensation payments received in connection with amendments to credit support annexes

in place for derivatives are presented as deferred income and amortised on a pro rata basis.

In the reporting period, amortisation had a positive one-off effect on net interest income

amounting to EUR 19 million.

Contingent liabilities are disclosed below the line at their nominal amount after deduction of

amortised cost and any risk provisions.

Foreign currency items in the balance sheet are translated into the reporting currency (EUR)

in accordance with the provisions of Section 256a HGB in conjunction with Section 340a (1)

and Section 340h HGB and pursuant to the provisions of IDW RS BFA 4. FMS-WM translated

its assets and liabilities at the average spot rate prevailing at 31 December 2019 using the

respective reference exchange rate of the ECB. Expenses and income arising from the currency

translation of on-balance sheet and off-balance sheet transactions denominated in foreign

currencies with special coverage in the same currency are presented net in other operating

expenses or other operating income. If excess assets result from the translation of off- balance

sheet transactions denominated in foreign currencies within the context of special coverage

according to Section 340h HGB, these are recognised in other assets. If excess liabilities

arise in this way, they are reported as other liabilities. If forward exchange transactions serve

to hedge interest-bearing items, the forward rate is split into its two elements (spot rate and

swap rate) in order to account for them separately for the purpose of determining the result.



96

To the extent that derivative financial instruments feature the exchange of principal (nomi-

nal exchange agreement), payments received or payments yet to be made are recognised in

other liabilities. Payments made or payments yet to be received are reported in other assets.

Expenses and income were translated into euros at the exchange rate on the transaction date.

Expenses and income arising from the currency translation are presented net under other

operating expenses or other operating income.

Interest income and interest expense for derivative financial instruments entered into are

presented gross, i. e. not netted, in the income statement.

Negative interest is shown in the income statement in accordance with the transaction under-

lying the agreement of negative interest: Negative interest contractually agreed for assets

reduces interest income, whereas negative interest contractually agreed for liabilities reduces

interest expense. For the negative interest thus deducted from interest income and interest

expense, an “Of which” item was in each case added to Form 3 provided by the RechKredV

and used for the presentation of the income statement (“Of which negative / positive interest

deducted”).

Starting with the annual financial statements as at 31 December 2019, interest expenses for

the Euro CP / CD Programme (2019: EUR 347 million; 2018: EUR 386 million) are now reported

under interest expenses for securitised liabilities. These interest expenses were previously

presented under interest expenses for lending and money market transactions. The relevant

disclosures in the notes for the previous year have been adjusted for the sake of improved

comparability.

FMS-WM avails itself of the option under Section 340f (3) HGB. Accordingly, income and

expenses from the measurement of loans, advances and securities allocated to the liquidity

reserve may be shown in a single item after offsetting against income and expenses from the

measurement and disposal of such transactions. This also includes additions to or reversals

of loan loss provisions.

FMS-WM avails itself of the option under Section 340c (2) HGB. Accordingly, expenses from

write-downs on long-term equity investments, shares in affiliated companies and securities

classified as fixed assets may be offset against the income from additions to such assets and

shown in a single expense and income item. Under Section 340c HGB, the expenses and

income from transactions involving such assets may also be included. FMS-WM also reports

the profit / loss from the sale of securities as well as the profit / loss from the termination of

related derivatives transactions in this item.



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97

Significant transactions with DEPFA Group companies

In connection with the mandate received in May 2014 to unwind the DEPFA Group 1 in a way

that maximises its value, FMS-WM again acquired additional liabilities from DEPFA Group

companies (“DEPFA liabilities”) with a nominal volume of EUR 0.1 billion in fiscal year 2019. At

31 December 2018, FMS-WM was already holding purchased DEPFA liabilities with a nominal

value of EUR 1.2 billion. Effective 7 June 2019, FMS-WM sold acquired DEPFA liabilities with

a nominal volume of EUR 1.3 billion to DEPFA ACS BANK DAC, Dublin (DEPFA ACS). In direct

connection with the sale of these liabilities, in a further step risk positions of DEPFA Group

companies were acquired with a nominal volume of EUR 1.6 billion (“1st portfolio extension

in fiscal year 2019”).

Effective 18 November 2019, FMS-WM sold subordinated (TIER II) loans of DEPFA BANK plc

with a nominal volume of EUR 0.4 billion to DEPFA BANK plc and sold the two hybrid capital

bonds of DEPFA Funding II LP, London (DEPFA Funding II) and DEPFA Funding III LP, London

(DEPFA Funding III) acquired in fiscal year 2015 with a nominal volume of EUR 0.6 billion to

the issuers. In direct connection with the sale of the TIER II loans and the hybrid capital loans,

in a further step risk positions of DEPFA Group companies were acquired with a nominal

volume of EUR 1.0 billion (“2nd portfolio extension in fiscal year 2019”). FMS-WM realised a

disposal gain of EUR 233 million in connection with the sale of the two hybrid capital bonds

in fiscal year 2019.

Effective 16 December 2019, FMS-WM acquired risk positions from DEPFA ACS with a nominal

volume of EUR 1.4 billion (“3rd portfolio extension in fiscal year 2019”). In connection with the

acquisition of these exposures by FMS-WM, DEPFA BANK plc repaid drawdowns on liquidity

facilities extended by FMS-WM.

Unless specified in greater detail, the portfolio extensions for fiscal years 2016 to 2019 are

henceforth summarised by the term “portfolio extensions”. The portfolio extensions in fiscal

year 2019 are thus summarised as such.

The nominal amounts of receivables of the risk positions acquired as part of the port folio

extensions in fiscal year 2019 are as follows for the respective balance sheet items as at

31 December 2019:

Nominal value

1st portfolio extension

2nd portfolio extension

3rd portfolio extension

31.12.2019in EUR million



Loans and advances to banks 0 362 0

Loans and advances to customers 384 201 0

Debt instruments 1,081 486 1,375

Total 1,465 1,049 1,375

1 DEPFA Group: DEPFA BANK plc and its indirect and direct subsidiaries.



98

NOTES TO THE BALANCE SHEET

The figures shown in the description of the following balance sheet items also include any

pro rata interest.

Assets

Cash reserve

The Cash reserve item shows a credit balance with Deutsche Bundesbank in the amount of

EUR 6,097 million (31 December 2018: EUR 4,869 million).

Loans and advances to banks




b) Other loans and advances 1,962 6,142

Total 34,671 36,028

Of which: to affiliated companies 405 5,042

Of which: to other long-term equity investments 0 0

The rise in loans and advances payable on demand is due to an increase in cash collateral

required to be provided for derivative positions. The decline in other loans and advances has

mainly resulted due to the sale of DEPFA liabilities and the TIER II loans as well as repayments

of the liquidity facilities drawn down by DEPFA BANK plc. This contrasts with the addition of

risk positions in connection with the 2nd portfolio extension in fiscal year 2019 with a nominal

volume of EUR 0.4 billion.

Loans and advances to af f i l iated companies include an amount of EUR 269 mil l ion

(31 December 2018: EUR 481 million) for loans and advances in connection with cash collat-

eral required to be provided for financial derivatives.

The remaining maturities of the other loans and advances to banks are as follows:



up to three months 600 3,497

More than three months and up to one year 637 818

More than one year and up to five years 0 205

More than five years 725 1,622

Total 1,962 6,142

The change within the maturity ranges for the other loans and advances to banks has resulted

due to the above-mentioned transactions with companies of the DEPFA Group.



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99

Loans and advances to customers



Total 15,731 13,300

Of which: to affiliated companies 0 103


The rise in loans and advances to customers is mainly due to an increase in cash collateral

payable on demand that was required to be provided for derivative positions as a result of

derivatives clearing at Eurex Clearing AG, Eschborn (31 December 2019: EUR 4,261 million;

31 December 2018: EUR 1,609 million), via the clearing member the Federal Republic of

Germany, represented by Bundesrepublik Deutschland – Finanzagentur GmbH, Frankfurt am

Main (German Finance Agency). These additions attributable to the portfolio extensions in

fiscal year 2019 with a nominal value of EUR 0.6 billion were set against the unwinding of a

nominal EUR 1.2 billion of the portfolio.

The remaining maturities of the loans and advances to customers are as follows:



Payable on demand 4,271 1,620

up to three months 121 111




Total 15,731 13,300

The increase in loans and advances to customers with a maturity of more than five years is

attributable to the additions within the scope of the portfolio extensions in fiscal year 2019.

As previously, there are no loans and advances with indefinite maturity.



100

Debt instruments

The Debt instruments item in the balance sheet is broken down as follows:



Book value 80,270 82,078

Of which: public-sector issuers 30,783 30,600

Of which: other issuers 34,636 34,790

Of which: own debt instruments 14,851 16,688

Marketable securities 80,270 82,078

Of which: listed 68,221 70,163

Of which: not listed 12,049 11,915

Securities sold under repurchase agreements 14,460 18,191

Securities due in the following year 9,161 7,157

Securities issued by affiliated companies 26 64

Of the marketable securit ies, securit ies with a book value of EUR 65,419 mil l ion

(31 December 2018: EUR 65,390 million) are held as fixed assets. Of the marketable securi-

ties, securities with a book value of EUR 26 million (31 December 2018: EUR 64 million) were

issued by affiliated companies.

In addition, the marketable securities include own debt instruments with a book value of

EUR 14,851 million (31 December 2018: EUR 16,688 million), which are measured using the

strict lower-of-cost-or-market principle because they are treated as current assets. The own

debt instruments held by FMS-WM serve to manage liquidity and to provide collateral.

The decline in debt instruments is due to the sale, scheduled repayment and disposal of

held-to-maturity securities as well as the decline in own debt instruments. This contrasts with

additions of risk positions associated with the portfolio extensions in fiscal year 2019.

The deferred write-downs on debt instruments total EUR 1,250 million based on their fair

values as at 31 December 2019 (31 December 2018: EUR 2,472 million). This comprises debt

instruments with book values of EUR 21,073 million (31 December 2018: EUR 31,361 million)

and fair values of EUR 19,823 million (31 December 2018: EUR 28,890 million). Where securities

carry hidden losses as at the reporting date, FMS-WM assumes that, due to its mostly long-term

wind-up strategy and the securities’ expected performance, their fair value will be temporarily

less than their book value. Corresponding write-downs were taken if there were any doubts

as to collectability.



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The book values and the fair values of the securities contained in the banking book, broken

down by issuer group, follow from the overview below. The book values include interest to

be accrued.

Other issuers

in EUR million

Of which:public- sector

issuersOf which:

banks

Of which:other

issuersTotal

31.12.2019Total

31.12.2018

Book value 30,783 2,223 32,413 65,419 65,390

Fair value 35,602 2,392 38,914 76,908 70,706

Hidden reserves 5,335 205 7,199 12,739 7,788

Hidden losses (deferred write-downs) 516 36 698 1,250 2,472

Of which:

Hidden losses, ABS 541 501

Of which:

Hidden losses, PiiGS countries 1 659 1,602

of which:

Portugal 5 30

ireland 26 3

italy 598 1,499

Spain 30 70

1 Issuer’s country of domicile

The hidden losses from ABS as at 31 December 2019 include EUR 118 million in losses

attributable to risks related to the PIIGS countries (31 December 2018: EUR 110 million).

The hidden losses and reserves from debt instruments are also exposed in some cases

to counter vailing effects on derivatives (particularly interest-based derivatives). For more

information, see the explanation under Derivative financial instruments.

Shares and other non-fixed-income securities

The Shares and other non-fixed-income securities item in the balance sheet is comprised as

follows:



Marketable securities 0 386

Of which: listed 0 0

Of which: not listed 0 386

During fiscal year 2019, FMS-WM sold the hybrid capital bonds issued by DEPFA Funding II

and DEPFA Funding III to the issuers, as a result of which the balance sheet item has a balance

of zero as at 31 December 2019.



102

Shares in affiliated companies and other long-term equity investments

None of the other long-term equity investments and shares in affiliated companies held by

FMS-WM are marketable.

The Shares in affiliated companies item in the balance sheet is comprised as follows:



Book value 474 493

Of which: shares in affiliated companies (banks) 323 323

Of which: shares in affiliated companies (financial services institutions) 30 50

Shares in affiliated companies (banks) relate to DEPFA BANK plc, whereas shares in affiliated

companies (financial services institutions) relate to FMS-SG. The capital reserves of FMS-SG

were released proportionately in fiscal year 2019 in the amount of EUR 20 million and returned

to the shareholder FMS-WM.

Intangible and tangible fixed assets, and financial assets

CostDepreciation / amortization /

write-downs Book value

in EUR million

Bal-ance

01.01.2019

Addi-tions2019

Dis-posals

2019

Cumu-lative

01.01.2019

Current year2019

Dis-posals

2019

Cumu-lative

31.12. 2019

Bal-ance

31.12. 2019

Bal-ance

31.12. 2018

intangible fixed assets 4.5 0.0 0.0 3.7 0.5 0.0 4.2 0.3 0.8

Tangible fixed assets 1.6 0.0 0.0 1.3 0.1 0.0 1.4 0.2 0.3

Shares in affiliated companies 493 19 1 474 493

Bonds and notes 65,390 29 1 65,419 65,390

Shares and other non-fixed-income securities 386 386 1 0 386

1 The option to combine items in accordance with Section 34 (3) RechKredV was used.

The intangible assets solely concern software licenses purchased for consideration.

The tangible fixed assets solely comprise operating and office equipment.

Other assets

Other assets in the amount of EUR 478 million (31 December 2018: EUR 890 million) mainly

include currency translation adjustments of EUR 365 million from off-balance sheet trans-

actions denominated in foreign currencies (31 December 2018: EUR 690 million), which are

recognised in the context of special coverage under Section 340h HGB. There are also tax

assets in the amount of EUR 38 million (31 December 2018: EUR 142 million).



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103

Prepaid expenses

Prepaid expenses are comprised of the following items:



unamortised cost of derivatives 7,274 4,903

Lending business (premium from receivables) 1,443 1,695

issuing business / loans taken out (discount, liabilities) 48 64

Other 3 3

Total 8,768 6,665

The unamortised cost of derivatives results, among other things, from payments made by

FMS-WM for the market values of derivatives recognised by the transferors as at the trans-

fer date in 2010. The item also contains unamortised payments made by FMS-WM to acquire

interest rate derivatives in connection with the wind-up task related to the DEPFA Group.

The increase in the unamortised cost of derivatives is attributable, inter alia, to the funding

activity and to the acquisition of derivatives in connection with the portfolio extensions in

fiscal year 2019 and the deferrable payments made. This was partially compensated for by

pro rata amortisation.

Prepaid expenses from lending business mainly include the deferred, unamortised payments

that FMS-WM made in 2010 for the hedge adjustments of the hedged items (receivables)

that were transferred from HRE Group companies 1 and for risk positions (loan receivables)

transferred in connection with the wind-up task related to the DEPFA Group. The decrease in

the reporting period is attributable to ongoing amortisation as well as the above-mentioned

sale of DEPFA liabilities. Additions within the scope of the portfolio extensions (receivables)

in fiscal year 2019 have partially compensated for the decline in prepaid expenses from the

lending business.

Subordinated assets

The following items on the assets side of the balance sheet contain subordinated assets:



Loans and advances to banks 0 360

Debt instruments 39 36

Shares and other non-fixed-income securities 0 386

Total 39 782

1 HRE Group: Hypo Real Estate Holding AG, Munich (HRE) and its direct and indirect, domestic and foreign subsidiaries and special purpose entities.



104

Equity and liabilities

Liabilities to banks



a) Payable on demand 948 618

b) With agreed maturity or notice period 2,597 9,410

Total 3,545 10,028



Liabilities to banks payable on demand consist of cash collateral received for derivative posi-

tions, of which EUR 638 million is attributable to DEPFA Group companies (31 December 2018:

EUR 84 million).

Liabilities with an agreed maturity or notice period consist mainly of liabilities from securities

repurchase agreements (as seller) in the amount of EUR 1,487 million (31 December 2018:

EUR 8,095 million). The change in the reporting period is mainly attributable to securities

repurchase agreements maturing as scheduled. In addition, liabilities from interest accruals

on derivatives amount to EUR 1,010 million (31 December 2018: EUR 1,209 million).

The remaining maturities of the liabilities with agreed maturity or notice period are as follows:



up to three months 0 3,923

More than three months and up to one year 2,499 5,389


More than five years 55 55

Total 2,597 9,410

Liabilities to customers



a) Payable on demand 86 148

b) With agreed maturity or notice period 40,893 13,579

Total 40,979 13,727





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105

Liabilities payable on demand consist mainly of cash collateral received for derivative posi-

tions in the amount of EUR 73 million (31 December 2018: EUR 148 million).

Liabilities with an agreed maturity or notice period consist mainly of funding taken out by FMS

in the current fiscal year for the first time, in the amount of EUR 25,011 million, as well as lia-

bilities from securities repurchase agreements (as seller), in the amount of EUR 13,057 million

(31 December 2018: EUR 9,501 million). Additional liabilities to customers include, in particular,

loans taken out in the amount of EUR 1,638 million (31 December 2018: EUR 1,672 million) and

term and time deposits in the amount of EUR 869 million (31 December 2018: EUR 2,200 million).

The remaining maturities of the liabilities with agreed maturity or notice period are as follows:



up to three months 12,145 9,155


More than one year and up to five years 15,519 192


Total 40,893 13,579

The increase in liabilities with maturities of more than one year has mainly resulted from new

funding taken out by FMS with a nominal volume of EUR 25.0 billion.

Securitised liabilities



a) Debt instruments issued 55,890 72,889

b) Other securitised liabilities 25,043 29,296

Total 80,933 102,185

Of which: to affiliated companies 0 2,050


Amounts due in the following year 51,287 55,551

Of which: Debt instruments issued 26,244 26,255

The securitised liabilities comprise EUR 55,890 million (31 December 2018: EUR 72,889 million)

in debt instruments issued and EUR 25,043 million (31 December 2018: EUR 29,296 million)

in issued European Commercial Paper.



106

The remaining maturities of the other securitised liabilities are as follows:






More than five years 0 0

Total 25,043 29,296

Other liabilities

Other liabilities mainly include currency translation adjustments of EUR 406 million from

off- balance sheet transactions denominated in foreign currencies (31 December 2018:

EUR 163 million), which are recognised in the context of special coverage under Section 340h

HGB, and liabilities of EUR 227 million from derivatives (31 December 2018: EUR 213 million).

Deferred income

Deferred income is comprised of the following items:



unamortised payments received for derivatives 17,615 16,270

issuing business / loans taken out 629 80

Lending business (discount on receivables) 39 30

Other 5 7

Total 18,288 16,387

The unamortised payments received for derivatives item results, among other things, from

payments received by FMS-WM for the market values of derivatives recognised by the trans-

ferors as at the transfer date in 2010. The item also contains unamortised payments received

by FMS-WM to acquire interest rate derivatives in connection with the wind-up task related

to the DEPFA Group. The increase in the unamortised payments received for derivatives is

attributable to the acquisition of further derivatives, inter alia in connection with the portfolio

extensions in fiscal year 2019. Ongoing amortisation partially compensated for this.

The increase in deferred income resulting from issuing business / loans taken out is attribut-

able to premiums associated with the funding received by FMS.

Deferred income from the lending business includes deferred payments received by FMS-WM

mainly at the transfer date in 2010 for hedge adjustments of the hedged items (receivables)

taken over from HRE Group companies.



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107

Provisions



Provision for taxes 19 28

Other provisions 322 437

of which: provisions for expected losses 306 417

Total 341 465

Provisions for expected losses consist mainly of provisions for expected losses for stand-

alone derivatives of EUR 149 million (31 December 2018: EUR 187 million) and for valua-

tion unit ineffectiveness under Section 254 HGB of EUR 105 million (31 December 2018:

EUR 118 million).

Equity

Please see the section entitled Statement of changes in equity for notes on the changes in

and composition of equity.

Contingent liabilities

FMS-WM discloses potential liabilities under guarantees in the amount of EUR 658 million

(31 December 2018: EUR 768 million). This includes obligations arising from CDS (with third

parties as counterparties) in the amount of EUR 600 million which are accounted for as finan-

cial guarantees (31 December 2018: EUR 618 million), and so called “transfers via guarantee”

in the amount of EUR 9 million (31 December 2018: EUR 43 million). There are no longer any

guarantees extended to affiliated companies as at 31 December 2019 (31 December 2018:

EUR 50 million).

The exposure is measured using the parameters applied in credit risk management (risk

analysis and assessment).

In the case of the risk positions “transfers via guarantee”, the assets guaranteed continue

to be accounted for by the transferring company. The guarantees are designed as abstract,

directly enforceable, irrevocable and unconditional guarantees.

Other obligations

Irrevocable loan commitments of EUR 1,916 million (31 December 2018: EUR 3,526 million)

include undrawn liquidity facilities in the amount of EUR 1,004 million (31 December 2018:

EUR 2,520 million), of which EUR 775 million (31 December 2018: EUR 2,465 million) relate

to DEPFA BANK plc.

In connection with the agreement on the “Ersatzdeckungslösung” (substitute cover solu-

tion), FMS-WM pledged to Deutsche Pfandbriefbank AG, Munich (pbb) to pay out up to

EUR 2,995 million to pbb on request. According to the payment plan, this obligation decreased

to EUR 881 million as at 31 December 2019 (31 December 2018: EUR 972 million). The “Ersatz-

deckungslösung” is included in the irrevocable loan commitments. A disbursement would

equally give rise to a claim of FMS-WM against pbb. In this respect, FMS-WM is exposed to

a default risk vis-à-vis the counterparty pbb.



108

Other financial obligations

Some of the outsourced services (inter alia FMS-SG, IBM Deutschland and DG FIS) are subject

to long-term agreements, giving rise to other financial obligations on the part of FMS-WM.

These agreements have fixed and variable performance components. An average contractual

volume of around EUR 100 million per year, of which an average of around 63% is attributable

to FMS-SG, is expected for the next three years.

Assets pledged as collateral

Apart from the securities sold under repurchase agreements as at 31 December 2019 (see the

description under Debt instruments) in the amount of EUR 14,460 million (31 December 2018:

EUR 18,191 million), there are no other assets pledged as collateral for liabilities or contingent

liabilities of FMS-WM.

Loans and advances to banks include an amount of EUR 131 million (31 December 2018:

EUR 118 million) that has been pledged to a customer as contractually agreed.

Derivative financial instruments

FMS-WM holds OTC derivatives not held for trading. The market values of the derivatives are

determined by means of standard measurement models based on the measurement param-

eters available in the market.

The table below shows the breakdown of FMS-WM’s interest-based and currency-based

derivatives and the total return swaps:

in EUR million

Nominal values

Remaining maturities, 31.12.2019

Total31.12.2019

Total31.12.2018< 1 year 1 – 5 years > 5 years

interest-based transactions 47,168 52,436 97,694 197,298 167,009

Total return swaps 0 1 4,228 4,229 4,278

Currency-based transactions 23,612 866 4,529 29,007 27,608

Of which: forward exchange transactions 20,534 0 0 20,534 16,105

Of which: cross currency swaps 3,078 866 4,529 8,473 11,503

Total 70,780 53,303 106,451 230,534 198,895

in EUR million

Fair values

31.12.2019 31.12.2018

Positive Negative Positive Negative

interest-based transactions 10,874 –49,398 6,958 –41,772

Total return swaps 1,114 –1,249 1,126 –1,144

Currency-based transactions 850 –905 1,162 –605

Of which: forward exchange transactions 85 –330 296 –32

Of which: cross currency swaps 765 –575 866 –573

Total 12,838 –51,552 9,246 –43,521



108


109

The book value of these derivatives reported in the prepaid expenses / deferred income item

(net amount of the book values recognised in assets and liabilities) totalled EUR –10,342 million

as at 31 December 2019 (31 December 2018: EUR –11,359 million). In the other assets / other

liabilities item, the net book value of these derivatives in the amount of EUR –209 million is

reported (31 December 2018: EUR 354 million).

The table below shows the breakdown of FMS-WM’s credit derivatives:

in EUR million

31.12.2019 31.12.2018

Nominal values Fair values

Nominal values Fair values

Secured party credit default swaps (CDS) 1,476 21 218 55

Guarantor credit default swaps (CDS) 645 –32 662 –45

Total 2,121 –11 880 10

The table shows the credit derivatives vis-à-vis third parties, with the derivatives where FMS-WM

is the guarantor being reported under contingent liabilities in the amount of EUR 600 million

(31 December 2018: EUR 618 million). The book values of those derivatives are recognised

in prepaid expenses and deferred income. As at 31 December 2019, the book values recog-

nised as assets and liabilities netted to EUR 1 million (31 December 2018: EUR –8 million).

As the secured party, FMS-WM acquired credit derivatives vis-à-vis third parties with a nominal

volume of EUR 1.3 billion in fiscal year 2019. These credit derivatives serve to protect against a

concrete default risk in the portfolio with a volume of EUR 1.1 billion as loan collateral received.

Valuation units

In accordance with Section 254 HGB, FMS-WM aggregates hedged items and hedging instru-

ments into valuation units. FMS-WM utilises the net valuation unit presentation method to

account for the valuation units. In particular, the hedged risk concerns the interest rate- induced

risk of changes in value (interest rate risk).

Overall, the nominal value of these hedged items is comprised as follows:

Nominal values of the hedged items 31.12.2019


in EUR million

Assets 40,264 41,690

Liabilities 63,711 50,380

Derivatives 14,329 9,685

Total 118,304 101,755

Furthermore, hedged items with a nominal value of EUR 4,229 million (31 December 2018:

EUR 4,308 million) were combined with total return swaps pursuant to IDW RS BFA 1. In fiscal

year 2019, hedged items with a nominal value of EUR 1,092 million were combined for the first

time with CDS pursuant to IDW RS BFA 1.



110

The following overviews contain the nominal values, broken down by their maturities, of

assets, liabilities and derivatives that are designated as hedged items in valuation units as at

31 December 2019 and whose countervailing changes in value or cash flows can be expected

to balance in the future.

Assets31.12.2019


in EUR million





Assets 40,264 41,690

Liabilities31.12.2019


in EUR million





Liabilities 63,711 50,380

Derivatives31.12.2019


in EUR million





Derivatives 14,329 9,685

The net hedge presentation method does not require presentation of the positive and neg-

ative changes in value (expenses and income) of the hedged risk in a micro valuation unit.

Were the gross hedge presentation method to be applied, net income of EUR 29,126 million

(31 December 2018: EUR 23,396 million) would arise on the basis of the current measurements.



110


111

The interest rate risk-related changes in the value of the hedged items and hedging instru-

ments arising from valuation units with negative ineffectiveness (interest rate risk hedge) can

be seen in the following overview:


Negativechange in value(absolute figure)

Positivechange in value(absolute figure)

Hedged items 1,173 14,305

Hedging instruments 14,387 1,150

Total 15,560 15,455

Of which: not recognised 15,455 0

Of which: recognised as a provision for expected losses 105 0

Foreign-currency items

Total assets in foreign currencies as at 31 December 2019 amount to EUR 59,693 million

(31 December 2018: EUR 59,057 million). Liabilities in foreign currencies as at 31 December 2019

amount to EUR 67,736 million (31 December 2018: EUR 69,708 million).



112

NOTES TO THE iNCOME STATEMENT

Net interest income

01.01. –31.12.2019

in EUR million

01.01. –31.12.2018

in EUR million

Interest income 6,744 6,522

Lending and money market transactions Of which: negative interest deducted EuR 247 million (previous year: EuR 658 million) 4,770 4,515

Fixed income securities and registered government debt 1,974 2,007

Interest expenses 6,419 6,174

Lending and money market transactions Of which: positive interest deducted EuR 305 million (previous year: EuR 635 million) 4,644 4,323

Securitised liabilities 952 1,078

Loans taken out –8 47

Other 831 726

Total 325 348

Net interest income of EUR 325 million in the fiscal year ended decline by EUR 23 million year-

on-year. Net interest income includes one-off effects in the amount of EUR 19 million (previ-

ous year: EUR 32 million) in connection with compensation payments received for contractual

adjustments to existing credit support annexes for derivatives. The year-on-year decrease in

net interest income adjusted for one-off effects is mainly attributable to the reduced volume

of the portfolio.

Interest income includes EUR 4,093 million (previous year: EUR 4,216 million) in interest from

derivative financial instruments. As last year, Western Europe and the United States account

for most of the interest income. Of the interest expenses, EUR 4,620 million (previous year:

EUR 4,628 million) relates to derivative financial instruments. The interest expenses from loans

taken out also include the amortisation of premiums in relation to the funding obtained via the

FMS, which has reduced interest expenses.

The method used to calculate negative interest was refined in the reporting period, inter

alia in relation to the variable components of interest rate derivatives. The figures for the

previous year for negative interest are therefore only comparable to a limited extent. If this

method had already been applied in the previous year, then in the period from 1 January

to 31 December 2018 interest income from lending and money market transactions would

have amounted to EUR 4,702 million (of which: negative interest deducted in the amount of

EUR 211 million), while interest expenses from lending and money market transactions would

have amounted to EUR 4,854 million (of which: positive interest deducted in the amount of

EUR 261 million). However, this has not had any effect on net interest income.

The Other item under interest expenses mainly includes amortisation of dif ferences in cases

where the acquisition costs of risk positions exceeds their nominal value.



112


113

Current income from shares in affiliated companies and

other long-term equity investments

01.01. –31.12.2019

in EUR million

01.01. –31.12.2018

in EUR million

Current income from

Other long-term equity investments 0 0

Shares in affiliated companies 49 0

Total 49 0

Current income from shares in affiliated companies results from a dividend payment disbursed

by the subsidiary Flint Nominees Ltd., London.

Income from profit transfer

In the fiscal year, FMS-WM collected the annual result of FMS-SG in the amount of EUR 1.4 million

due to the existing profit transfer agreement with FMS-SG.

Net commission income

01.01. –31.12.2019

in EUR million

01.01. –31.12.2018

in EUR million

Commission income 13 16

Derivative business 8 10

Lending business 4 6

Other 1 0

Commission expenses 18 12

Securities and issuing business 5 6

Derivatives business 12 5

Other 1 1

Total –5 4

The decline in net commission income is due, on the one hand, to the unwinding of the port-

folio and the resulting decrease in commission income from lending and derivative business

and, on the other hand, to the increased expenses from derivative business registered in the

past fiscal year. This has resulted from the hedging of risk positions by means of CDS hedg-

ing instruments in the past fiscal year.



114

Other operating income and expenses

Other operating income of EUR 9 million (previous year: EUR 15 million) mainly includes income

of EUR 3 million (previous year: EUR 4 million) from services provided by FMS-WM to affiliated

companies and reversals of provisions of EUR 2 million (previous year: EUR 2 million). Other

operating expenses of EUR 11 million (previous year: EUR 6 million) mainly include expenses

from foreign currency translation in the amount of EUR 7 million (previous year: income from

foreign currency translation in the amount of EUR 2 million), portfolio-related costs and trans-

action costs.

General and administrative expenses

01.01. –31.12.2019

in EUR million

01.01. –31.12.2018

in EUR million

Personnel expenses 19 19

Other administrative expenses 119 125

Total 138 144

Personnel expenses for the staff employed by FMS-WM in fiscal year 2019 remained steady

at EUR 19 million (previous year: EUR 19 million).

The other administrative expenses mainly result from expenses incurred in the context of

service outsourcing (portfolio servicing, administrative and back office activities, IT services,

and accounting services).

Including all service providers employed, expenses for servicing the portfolio decreased by

EUR 6 million to EUR 94 million year-on-year (previous year: EUR 100 million). Other administra-

tive expenses amounted to EUR 25 million in the 2019 fiscal year (previous year: EUR 25 million).

Depreciation, amortisation and write-downs of intangible and tangible fixed assets

Depreciation and amortisation of intangible and tangible f ixed assets amounts to

EUR 547 thousand (previous year: EUR 574 thousand).

Write-downs of and valuation allowances on receivables and certain securities,

and additions to loan loss provisions

The following income and expenses are reported in this item:

01.01. –31.12.2019

in EUR million

01.01. –31.12.2018

in EUR million

Net revaluation gain / loss in the lending business –285 311

Net revaluation gain / loss from securities classified as current assets 2 –1

Total –283 310



114


115

This item shows a net revaluation loss of EUR 283 million for fiscal year 2019. The net revalu-

ation loss from the lending business of EUR 285 million mainly reflects the valuations carried

out in the reporting period to cover credit risks.

Income from reversals of write-downs of shares in affiliated companies, other

long-term equity investments and securities classified as fixed assets

The following income and expenses were recognised in this item:

01.01. –31.12.2019

in EUR million

01.01. –31.12.2018

in EUR million

Net gain / loss on sale of securities incl. net gain / loss from derivatives 235 –386

Net revaluation gain / loss from derivatives 44 49

Net revaluation gain / loss from securities 27 –78

Other income / expenses 0 0

Total 306 –415

The net gain / loss on sale of securities incl. the net gain / loss from derivatives is primarily due

to a disposal gain of EUR 233 million resulting from the sale of the hybrid capital bonds issued

by DEPFA Funding II and DEPFA Funding III to the issuers.

The net revaluation gain from derivatives includes net reversals of provisions for expected

losses for stand-alone derivatives in the amount of EUR 28 million and for valuation unit

ineffectiveness under Section 254 HGB in the amount of EUR 16 million.

The net revaluation gain from securities is mainly due to the reversal of valuation measures

to cover default risks.

Taxes on income

Taxes on income are attributable to corporate income tax, the solidarity surcharge, trade

tax and Italian income taxes. The net expenses of EUR 17 million reported under this item in

the fiscal year ended result from current tax expenses of EUR 34 million and tax income for

previous years of EUR 17 million.



116

OTHER DiSCLOSuRES

Auditor’s fee

The auditor’s fee recognised during the fiscal year in the amount of EUR 2.1 million (previous

year: EUR 1.9 million) is comprised as follows:

01.01. –31.12.2019

in EUR million

01.01. –31.12.2018

in EUR million

Audit services 1.9 1.8

Other assurance services 0.2 0.1

Tax advisory services 0.0 0.0

Total 2.1 1.9

The expenses shown in the table are gross amounts.

Auditing services relate to the audit of these annual financial statements and the review of the

half-yearly financial statements for the period ended 30 June 2019.

Other assurance services concern the preparation of comfort letters in connection with

FMS-WM’s issuance activities.

Of the expenses recognised in the reporting year, EUR 0 thousand (previous year:

EUR 29 thousand) concern tax advisory services.

Proposal for the appropriation of net income / loss

In accordance with Section 13 of the Charter, the Executive Board proposes to the Super visory

Board that the net income for fiscal year 2019 be allocated to retained earnings.



116


117

Shareholdings

The following overview shows the shares in af f i l iated companies of FMS-WM as at

31 December 2019, each of which is based on the company’s most recent annual financial

statements.

Name and registered officeShare in

capitalOf which: indirectly

Equityin thousand

Resultin thousand Currency 10

DEPFA ACS BANK DAC, Dublin 100.00% 100.00% 587,541 3 –8,636 4 EuR

DEPFA BANK plc, Dublin 100.00% 696,638 3 112,785 4 EuR

DEPFA Finance N.V., Amsterdam 8 100.00% 100.00% 82 3 –3,066 4 EuR

DEPFA Hold Six, Dublin 8 100.00% 100.00% 0 3 0 4 uSD

DEPFA ireland Holding Ltd, Dublin 8 100.00% 100.00% 21 3 –7 4 EuR

DEPFA international S.A., Luxembourg 100.00% 100.00% 5,041 3 2,211 4 EuR

Flint Nominees Ltd., London 100.00% 8,564 1 497 2 GBP

FMS Wertmanagement Service GmbH, unterschleißheim 100.00% 30,000 1 0 2.7 EuR

Hypo Property investment (1992) Ltd., London 9 100.00% 100.00% 1 5 0 6 GBP

Hypo Property investment Ltd., London 9 100.00% 100.00% 292 5 0 6 GBP

Hypo Property Services Ltd., London 9 100.00% 100.00% 116 5 0 6 GBP

Hypo Real Estate Capital Corp., New york 100.00% 53,214 5 1,040 6 uSD

upgrade 1 LLC, Wilmington / Delaware 100.00% 100.00% 312 5 –1 6 uSD

WH-Erste Grundstücks Verwaltungs GmbH, Munich 100.00% 28 1 –26 2 EuR

WH-Erste Grundstücks GmbH & Co. KG, Munich 93.98% 109,535 1 22,909 2 EuR

1 31 December 20192 20193 31 December 2019 preliminary 4 2019 preliminary5 31 December 20186 2018 7 After profit transfer8 In liquidation9 Liquidated effective 10 March 202010 Exchange rates as at 31 December 2019: 1 EUR = 0.8508 GBP

1 EUR = 1.1234 USD



118

Corporate bodies of FMS Wertmanagement

Members of the Executive Board

Christoph Müller, CRO / CFO (until 30 June 2019); CEO, Spokesman of the Executive Board

(from 1 July 2019)

Carola Falkner, Asset Management & Treasury (from 1 July 2019)

Stephan Winkelmeier, CEO, Spokesman of the Executive Board (until 30 June 2019)

Frank Hellwig, COO (until 30 September 2019)

Stephan Winkelmeier, Spokesman of the Executive Board with responsibility for the position

of CEO, left FMS-WM at his own request effective 30 June 2019. Christoph Müller took on the

role of Spokesman of the Executive Board with responsibility for the CEO division effective

1 July 2019. Carola Falkner was appointed to the Executive Board with responsibility for the

Asset Management & Treasury division effective 1 July 2019. Frank Hellwig, who was respon-

sible for the COO division, left FMS-WM at his own request effective 30 September 2019.

Christoph Müller and Carola Falkner assumed responsibility for the previous COO division on

1 October 2019.

Members of the Supervisory Board

Jan Bettink (until 5 January 2020)

Chairman of the Supervisory Board

Bankkaufmann (qualified banker)

Dr. Michael Kemmer (since 6 January 2020)

Chairman of the Supervisory Board (since 6 February 2020)

Diplom-Kaufmann (business administration degree)

Dr. Jutta Dönges

Deputy Chairwoman of the Supervisory Board

Managing Director of Bundesrepublik Deutschland – Finanzagentur GmbH

Rita Geyermann

Deputy Chairwoman of the Supervisory Board

Director, Head of Asset Management at KfW Bankengruppe



118


119

Dr. Axel Berger

Auditor and tax adviser

Dr. Tammo Diemer

Managing Director of Bundesrepublik Deutschland – Finanzagentur GmbH

Birgit Dietl-Benzin

Chief Risk Officer, Member of the Management Board of UBS Europe SE

Michaela Maria Eder von Grafenstein

Member of the Executive Committee of the Aquila Group

Spokesperson of Kapitalverwaltungsgesellschaft Aquila Capital Investmentgesellschaft mbH

Ingo Mandt (until 11 November 2019)

Bankkaufmann (qualified banker)

Dr. Holger Horn (from 1 February 2020)

Member of the Board of Management of Münchener Hypothekenbank eG

Loans to members of the corporate bodies

At the reporting date, there were no claims in respect of members of the corporate bodies

arising from loans or advances.

Remuneration of the corporate bodies

The members of FMS-WM’s Executive Board were paid remuneration of EUR 1,264 thousand

for fiscal year 2019 (previous year: EUR 1,336 thousand). They were also paid benefits in kind

of EUR 18 thousand (previous year: EUR 40 thousand). In addition, a total of EUR 138 thousand

(previous year: EUR 150 thousand) were expended in the reporting period for the pension

plans applicable to the members of the Executive Board.

Total remuneration of EUR 203 thousand was paid to the members of FMS-WM’s Supervisory

Board for 2019 (previous year: EUR 180 thousand).

Annual average number of employees

At 31 December 2019, FMS-WM had 103 employees (31 December 2018: 112). The average

number of employees in fiscal year 2019 was:

Women Men Total

Employees 39 68 107



120

Seats held by Executive Board members

In fiscal year 2019, the members of the Executive Board of FMS-WM held the following seats

on a supervisory board or other supervisory bodies of large corporations in accordance with

Section 340a (4) No. 1 HGB in conjunction with Section 267 (3) HGB.

Members of the Executive Board:

▶ Christoph Müller:

Non-executive member of the Board of Directors (Chairman) of DEPFA BANK plc, Dublin,

DEPFA ACS BANK DAC, Dublin, and DEPFA International S.A. (Chairman), Luxembourg,

(Group offices held).

▶ Carola Falkner (from 1 July 2019):

Non-executive member of the Board of Directors of DEPFA BANK plc, Dublin, (Group office

held).

▶ Stephan Winkelmeier (until 30 June 2019):

Member of the Supervisory Board of Bayerische Landesbank, Munich.

Non-executive member of the Board of Directors (Chairman) of DEPFA BANK plc, Dublin,

(Group office held).

▶ Frank Hellwig (until 30 September 2019):

Non-executive member of the Board of Directors of DEPFA BANK plc, Dublin, and of DEPFA

ACS BANK DAC, Dublin, (Group offices held).



120


121

REPORT ON POST-BALANCE SHEET DATE EVENTS

Due to the completion of sales in the current fiscal year 2020, as of the date of preparation

of these annual financial statements the Commercial Real Estate segment had declined to a

nominal volume of EUR 0.4 billion, divided up between eight remaining borrowers.

Since about mid-February 2020, the macroeconomic developments have been dominated

by the spread of coronavirus (SARS-CoV-2 / COVID-19). This could do serious and sustained

damage to expected macroeconomic developments around the world. This is particularly

true for economies relevant to the FMS-WM portfolio such as Italy, the United Kingdom and

the USA. The particularly severe impact of the spread of coronavirus in Italy could negatively

impact not only the country’s economic growth trend but also its debt.



122

r espons ib il it y statement

iN ACCORDANCE WiTH SECTiON 264 (2) SENTENCE 3 HGB AND

SECTiON 289 (1) SENTENCE 5 HGB

To the best of our knowledge, and in accordance with the applicable reporting principles,

the annual financial statements give a true and fair view of the assets, liabilities, financial

position and profit or loss of FMS-WM, and the management report includes a fair review of

the development and performance of the business and the position of FMS-WM, together

with a description of the material opportunities and risks associated with the expected devel-

opment of FMS-WM.

Munich, 17 March 2020

FMS Wertmanagement

The Executive Board

Christoph Müller Carola Falkner

F i N A N C i A L R E P O R T / R E S P O N S i B i L i T y S TAT E M E N T N O T E S


122


123

independent aud itor’s r eport

To FMS Wertmanagement AöR, München

REPORT ON THE AuDiT OF THE ANNuAL FiNANCiAL STATEMENTS AND OF

THE MANAGEMENT REPORT

Audit Opinions

We have audited the annual financial statements of FMS Wertmanagement AöR, München,

which comprise the balance sheet as at 31 December 2019, the statement of profit and loss,

cash flow statement and statement of changes in equity for the financial year from 1 January

to 31 December 2019 and notes to the financial statements, including the presentation of the

recognition and measurement policies. In addition, we have audited the management report

of FMS Wertmanagement AöR for the financial year from 1 January to 31 December 2019.

In our opinion, on the basis of the knowledge obtained in the audit,

▶ the accompanying annual financial statements comply, in all material respects, with the

requirements of German commercial law and give a true and fair view of the assets, liabili-

ties and financial position of the Company as at 31 December 2019 and of its financial per-

formance for the financial year from 1 January to 31 December 2019 in compliance with

German Legally Required Accounting Principles, and

▶ the accompanying management report as a whole provides an appropriate view of the

Company’s position. In all material respects, this management report is consistent with the

annual financial statements, complies with German legal requirements and appropriately

presents the opportunities and risks of future development.

Pursuant to § 322 Abs. 3 Satz 1 HGB [Handelsgesetzbuch: German Commercial Code], we

declare that our audit has not led to any reservations relating to the legal compliance of the

annual financial statements and of the management report.

F i N A N C i A L R E P O R T / i N D E P E N D E N T A u D i T O R r S R E P O R T


124

Basis for the Audit Opinions

We conducted our audit of the annual financial statements and of the management report

in accordance with § 317 HGB and the EU Audit Regulation (No. 537/2014, referred to sub-

sequently as “EU Audit Regulation”) in compliance with German Generally Accepted Standards

for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer [Institute of

Public Auditors in Germany] (IDW). Our responsibilities under those requirements and principles

are further described in the “Auditor’s Responsibilities for the Audit of the Annual Financial

Statements and of the Management Report” section of our auditor’s report. We are inde-

pendent of the Company in accordance with the requirements of European law and German

commercial and professional law, and we have fulfilled our other German professional respon-

sibilities in accordance with these requirements. In addition, in accordance with Article 10 (2)

point (f ) of the EU Audit Regulation, we declare that we have not provided non-audit services

prohibited under Article 5 (1) of the EU Audit Regulation. We believe that the audit evidence

we have obtained is sufficient and appropriate to provide a basis for our audit opinions on the

annual financial statements and on the management report.

Key Audit Matters in the Audit of the Annual Financial Statements

Key audit matters are those matters that, in our professional judgment, were of most signifi-

cance in our audit of the annual financial statements for the financial year from 1 January to

31 December 2019. These matters were addressed in the context of our audit of the annual

financial statements as a whole, and in forming our audit opinion thereon; we do not provide

a separate audit opinion on these matters.

In our view, the matters of most significance in our audit were as follows:

1 Adequacy of loan loss provisions in the customer lending business

2 Model-based valuated financial instruments (securities and derivatives)

Our presentation of these key audit matters has been structured in each case as follows:

1 Matter and issue

2 Audit approach and findings

3 Reference to further information



124


125

Hereinafter we present the key audit matters:

1 Adequacy of loan loss provisions in the customer lending business

1 The customer lending business comprises loans and advances to customers, liabilities

from guarantees and indemnity agreements as well as irrevocable loan commitments.

In the annual financial statements of FMS-WM, receivables from customers amount-

ing to € 15.7 billion, liabilities from guarantees and indemnity agreements amounting to

€ 0.7 billion and irrevocable loan commitments amounting to € 1.9 billion are reported. In

the 2019 financial year, expenses of € 0.3 billion incurred from the write-offs of claims and

certain securities as well as additions to provisions in the lending business. The meas-

urement of provisions for losses on loans and advances to customers is determined in

particular by the estimates of the legal representatives with regard to future loan defaults,

the structure and quality of the loan portfolios and macroeconomic factors and, where

applicable, potential expected sales prices. The amount of the specific valuation allow-

ances on loans and advances to customers corresponds to the difference between the

loan amounts still outstanding and the lower value to be attributed to them on the balance

sheet date. The amount of the individual provisions for contingent liabilities is based on

the risk of utilization. Existing collateral is taken into account. For latent default risks, gen-

eral valuation allowances and provisions are formed on the basis of the expected loss,

which is determined on the basis of statistical data. The value adjustments in the cus-

tomer lending business are of great importance for the assets and earnings situation of

FMS-WM on the one hand and on the other hand involve considerable discretionary lee-

way for the legal representatives. In addition, the valuation parameters applied, which

are subject to significant uncertainties, have a significant influence on the formation and

amount of any necessary value adjustments. Against this background, this matter was of

particular importance in the context of our audit.

2 As part of our audit, we first assessed the appropriateness of the design of the controls

in the relevant internal control system of FMS-WM and tested the functionality of the

controls. We have taken into account the business organization, the IT systems and the

relevant valuation models. In addition, we assessed the valuation in the customer lend-

ing business, including the appropriateness of estimated values, on the basis of random

samples of credit exposures. When selecting the credit exposures to be reviewed, we

also took off-balance sheet risk positions into account. Among other things, we assessed

the available documents of FMS-WM with regard to the economic circumstances and

the recoverability of the corresponding collateral. In the case of property collateral for

which FMS-WM has submitted valuations to us, we have obtained an understanding of

the underlying source data, the valuation parameters applied and the assumptions made,

have critically evaluated these and assessed whether they lie within a reasonable range.

Furthermore, we have assessed the calculation methods applied by FMS-WM as well as

the underlying assumptions and parameters in order to assess the risk provisions deter-

mined. On the basis of the audit procedures we performed, we satisfied ourselves over-

all of the appropriateness of the assumptions made by the legal representatives when

reviewing the recoverability of the loan portfolio and of the appropriateness and effec-

tiveness of the processes implemented by FMS-WM.



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3 The information provided by FMS-WM on customer lending business is contained in the

sections “Accounting policies” and “Notes to the balance sheet” of the Notes.

2 Model-based valuated financial instruments (securities and derivatives)

1 For the purposes of accounting or presentation in the notes, FMS-WM determines the

fair value for its financial instruments. If no active market or observable prices of com-

parable instruments are available, the fair value is determined using the company’s own

valuation models. Bonds and other fixed-income securities amounted to € 65.4 billion at

the balance sheet date. Of this amount, € 10.6 billion relates to unlisted bonds and other

fixed-income securities for which no observable market prices are available and whose fair

values are determined based on our own valuation models. Derivatives in the amount of

€ 232.6 billion (nominal value) respectively € 12.8 billion (positive fair value) and € 51.6 billion

(negative fair value) are held at the balance sheet date. These consist exclusively of unlisted

OTC derivatives, the fair value of which is determined using the company’s own valua-

tion models. The key parameters of the valuation models used by FMS-WM are based on

estimates that involve uncertainties and discretion. As a result, there are increased valu-

ation uncertainties and valuation ranges for the fair values of these financial instruments.

This applies in particular to complex financial instruments and the use of unobservable

measurement parameters. Against this background and due to the potential effects of

the existing valuation uncertainties on the annual financial statements, the determination

of the fair value of model-valued securities and derivatives was of particular importance

in the context of our audit.

2 As part of our audit, we analyzed in particular the model-valued securities and derivatives,

with the focus on positions with increased valuation uncertainties. With the involvement

of our internal valuation specialists, we assessed the adequacy of the valuation models

used, the adequacy of the data supply procedures and the adequacy and effectiveness

of the relevant controls of the internal control system of FMS-WM for the valuation of the

securities and derivatives concerned. The subject of these controls is the independent

verification of the price sources and valuation parameters used and the independent

validation of the valuation models. In addition, we carried out an own, independent and

risk- oriented revaluation for selected illiquid financial instruments as of the balance sheet

date and compared the results with the values determined by the company. The fair values

of securities and derivatives determined based on the valuation methods and assump-

tions applied by the legal representatives are within reasonable ranges in our opinion.

3 The information provided by FMS-WM on the model-based valuation of financial instru-

ments (securities and derivatives) is contained in the sections “Accounting Policies” and

“Notes to the Balance Sheet” of the Notes.



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127

Other Information

The executive directors are responsible for the other information. The other information com-

prises the annual report – excluding cross-references to external information – with the excep-

tion of the audited annual financial statements, the audited management report and our

auditor’s report.

Our audit opinions on the annual financial statements and on the management report do not

cover the other information, and consequently we do not express an audit opinion or any other

form of assurance conclusion thereon.

In connection with our audit, our responsibility is to read the other information and, in so doing,

to consider whether the other information

▶ is materially inconsistent with the annual financial statements, with the management report

or our knowledge obtained in the audit, or

▶ otherwise appears to be materially misstated.



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Responsibilities of the Executive Directors and the Supervisory Board

for the Annual Financial Statements and the Management Report

The executive directors are responsible for the preparation of the annual financial state-

ments that comply, in all material respects, with the requirements of German commercial

law, and that the annual financial statements give a true and fair view of the assets, liabilities,

financial position and financial performance of the Company in compliance with German Legally

Required Accounting Principles. In addition, the executive directors are responsible for such

internal control as they, in accordance with German Legally Required Accounting Principles,

have determined necessary to enable the preparation of annual financial statements that are

free from material misstatement, whether due to fraud or error.

In preparing the annual financial statements, the executive directors are responsible for assess-

ing the Company’s ability to continue as a going concern. They also have the responsibility for

disclosing, as applicable, matters related to going concern. In addition, they are responsible

for financial reporting based on the going concern basis of accounting, provided no actual or

legal circumstances conflict therewith.

Furthermore, the executive directors are responsible for the preparation of the management

report that as a whole provides an appropriate view of the Company’s position and is, in all

material respects, consistent with the annual financial statements, complies with German

legal requirements, and appropriately presents the opportunities and risks of future develop-

ment. In addition, the executive directors are responsible for such arrangements and meas-

ures (systems) as they have considered necessary to enable the preparation of a manage-

ment report that is in accordance with the applicable German legal requirements, and to be

able to provide sufficient appropriate evidence for the assertions in the management report.

The supervisory board is responsible for overseeing the Company’s financial reporting pro-

cess for the preparation of the annual financial statements and of the management report.



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129

Auditor’s Responsibilities for the Audit of the Annual Financial Statements

and of the Management Report

Our objectives are to obtain reasonable assurance about whether the annual financial state-

ments as a whole are free from material misstatement, whether due to fraud or error, and

whether the management report as a whole provides an appropriate view of the Company’s

position and, in all material respects, is consistent with the annual financial statements and

the knowledge obtained in the audit, complies with the German legal requirements and appro-

priately presents the opportunities and risks of future development, as well as to issue an

auditor’s report that includes our audit opinions on the annual financial statements and on

the management report.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit con-

ducted in accordance with § 317 HGB and the EU Audit Regulation and in compliance with

German Generally Accepted Standards for Financial Statement Audits promulgated by the

Institut der Wirtschaftsprüfer (IDW) will always detect a material misstatement. Misstatements

can arise from fraud or error and are considered material if, individually or in the aggregate,

they could reasonably be expected to influence the economic decisions of users taken on the

basis of these annual financial statements and this management report.

We exercise professional judgment and maintain professional skepticism throughout the audit.

We also:

▶ Identify and assess the risks of material misstatement of the annual financial statements and

of the management report, whether due to fraud or error, design and perform audit proce-

dures responsive to those risks, and obtain audit evidence that is sufficient and appropriate

to provide a basis for our audit opinions. The risk of not detecting a material misstatement

resulting from fraud is higher than for one resulting from error, as fraud may involve collu-

sion, forgery, intentional omissions, misrepresentations, or the override of internal controls.

▶ Obtain an understanding of internal control relevant to the audit of the annual financial state-

ments and of arrangements and measures (systems) relevant to the audit of the manage-

ment report in order to design audit procedures that are appropriate in the circumstances,

but not for the purpose of expressing an audit opinion on the effectiveness of these systems

of the Company.

▶ Evaluate the appropriateness of accounting policies used by the executive directors and

the reasonableness of estimates made by the executive directors and related disclosures.



130

▶ Conclude on the appropriateness of the executive directors’ use of the going concern basis

of accounting and, based on the audit evidence obtained, whether a material uncertainty

exists related to events or conditions that may cast significant doubt on the Company’s

ability to continue as a going concern. If we conclude that a material uncertainty exists, we

are required to draw attention in the auditor’s report to the related disclosures in the annual

financial statements and in the management report or, if such disclosures are inadequate,

to modify our respective audit opinions. Our conclusions are based on the audit evidence

obtained up to the date of our auditor’s report. However, future events or conditions may

cause the Company to cease to be able to continue as a going concern.

▶ Evaluate the overall presentation, structure and content of the annual financial statements,

including the disclosures, and whether the annual financial statements present the under-

lying transactions and events in a manner that the annual financial statements give a true

and fair view of the assets, liabilities, financial position and financial performance of the

Company in compliance with German Legally Required Accounting Principles.

▶ Evaluate the consistency of the management report with the annual financial statements, its

conformity with German law, and the view of the Company’s position it provides.

▶ Perform audit procedures on the prospective information presented by the executive direc-

tors in the management report. On the basis of sufficient appropriate audit evidence we eval-

uate, in particular, the significant assumptions used by the executive directors as a basis for

the prospective information, and evaluate the proper derivation of the prospective informa-

tion from these assumptions. We do not express a separate audit opinion on the prospec-

tive information and on the assumptions used as a basis. There is a substantial unavoidable

risk that future events will dif fer materially from the prospective information.

We communicate with those charged with governance regarding, among other matters, the

planned scope and timing of the audit and significant audit findings, including any significant

deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with

the relevant independence requirements, and communicate with them all relationships and

other matters that may reasonably be thought to bear on our independence, and where appli-

cable, the related safeguards.

From the matters communicated with those charged with governance, we determine those

matters that were of most significance in the audit of the annual financial statements of the

current period and are therefore the key audit matters. We describe these matters in our

auditor’s report unless law or regulation precludes public disclosure about the matter.



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131

OTHER LEGAL AND REGuLATORy REQuiREMENTS

Further Information pursuant to Article 10 of the EU Audit Regulation

We were elected as auditor by the supervisory board on 29 March 2019. We were engaged

by the supervisory board on 29 March 2019. We have been the auditor of the FMS Wertman-

agement AöR, München, without interruption since the financial year 2018.

We declare that the audit opinions expressed in this auditor’s report are consistent with the

additional report to the audit committee pursuant to Article 11 of the EU Audit Regulation

(long-form audit report).

GERMAN PuBLiC AuDiTOR RESPONSiBLE FOR THE ENGAGEMENT

The German Public Auditor responsible for the engagement is Stefan Palm.

Munich, 17 March 2020

PricewaterhouseCoopers GmbH

Wirtschaftsprüfungsgesellschaft

[Original German version signed by:]

Stefan Palm Axel Menge

Wirtschaftsprüfer Wirtschaftsprüfer

[German Public Auditor] [German Public Auditor]



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FMS Wertmanagement

Anstalt öffentlichen Rechts

Prinzregentenstrasse 56

80538 Munich, Germany

Phone: +49 89 954 76 27-0

Fax: +49 89 954 76 27-800

Consulting, Concept & Design

Silvester Group

www.silvestergroup.com


132

FMS Wertmanagement

Anstalt öffentlichen Rechts

Prinzregentenstrasse 56

80538 Munich, Germany

Phone: +49 89 954 76 27-0

Fax: +49 89 954 76 27-800

Documents

FMS Wertmanagement AöR · 2 DEPFA Group presentation from takeover in 2014 At a glance 2018 All wind-up figures and porftolio effects including currency effects. 91 2 2016 2018 2019